ICG

Chapter 8: The Governance of Corporate Risk...............................................................................................................................1

Chapter 9: The Board and Business Ethics......................................................................................................................................8
Chapter 10: Governance of Listed Companies.............................................................................................................................13
Chapter 13: Board Membership: Directors appointment, roles, and remuneration..................................................................20
Chapter 15: Board Activities: Corporate Governance in Practice................................................................................................28
Chapter 17: Board Evaluation: Reviewing directors and boards...................................................................................................33
Questions...................................................................................................................................................................................... 33
Chapter 8................................................................................................................................................................................... 33
Chapter 9................................................................................................................................................................................... 36
Chapter 10................................................................................................................................................................................. 38
Chapter 13................................................................................................................................................................................. 40
Chapter 15................................................................................................................................................................................. 43
Chapter 17................................................................................................................................................................................. 44

Chapter 8: The Governance of Corporate Risk

What is corporate risk?
Corporate risk involves the gain or loss that might be incurred by an uncertain future event. It involves a statistical concept—the
probability of an event occurring and its possible effect.
In a corporate entity, risk can arise at every decision-making level:
1. strategic risk—for example the risk of an unexpected hostile takeover bid, or the effects of Britain leaving the European
Union, or the devaluation of a currency in which the enterprise holds a significant interest;
2. managerial risk reflects hazards that occur from the organization’s activities; for example,
 product liability, third-party risks,
 the risk of a fire that destroys production capacity,
 or a cyber-attack
3. operational risk—such as the injury of an employee while at work, a traffic accident involving a company vehicle, or theft of
spare parts

Frameworks for enterprise risk management

AON, an international insurance group, suggested that the global financial crisis had significantly increased board-level awareness of
the need to manage and leverage risk. The company identified the following hallmarks of advanced enterprise risk management
(ERM):
 board-level commitment to ERM as a critical framework for successful decision-making and for driving value
 the engagement of all stakeholders in the development of risk management strategy and policy setting
 a move from focusing on risk avoidance to risk management options to extract business value.
In the light of the global financial crisis, the Steering Group on Corporate Governance of the Organisation for Economic Cooperation
and Development (OECD) re-examined the adequacy of its corporate governance principles.
Building on the OECD Principles, the report proposed that it is good practice for: 2010 report proposed
 1. the risk management function to report directly to the board;
2. the risk management function to consider any risks arising directly from the compensation and incentive systems in place;
3. the effectiveness of the risk assessment and management process to be monitored and the results disclosed.
In 2004 COSO – Committee of sponsoring organization provided an integrated framework for ERM, building on the 2002 Sarbanes-
Oxley Act. It explained that:
Enterprise risk management is a process affected by
 the entity’s board of directors, management, and other personnel, applied in strategy setting and across the enterprise,
 and manage risk so that it is within the risk appetite,
 to provide reasonable assurance regarding the achievement of objectives.
 The challenge facing boards: balances managing risks while adding value to the organization
COSO’s Enterprise Risk Management Integrated Framework highlights four areas for board oversight of ERM:
1. understand the entity’s risk philosophy and concur with the entity’s risk appetite
2. know the extent to which management has established effective enterprise risk management of the organization
3. review the entity’s portfolio of risk and consider it against the entity’s risk appetite
4. Be informed of the most significant risks and whether management is responding appropriately.
The New York Stock Exchange’s listing rules require the audit committees of listed corporations to explain their risk assessment and
management policies.
The UK Corporate Governance Code, 3 previously the UK Combined Code, includes principles on boards’ responsibility for risk
management, calling for an integrated approach to ERM.
In 2010, the International Corporate Governance Network (ICGN) enhanced its Global Corporate Governance Principles with a set of
Corporate Risk Oversight Guidelines. 4 The Guidelines emphasize that:
 the risk oversight process begins with the board
 corporate management is responsible for developing and executing an enterprise’s strategic and routine operational risk
programme
 shareholders, directly or through designated agents, have a responsibility monitor the effectiveness of boards in overseeing
risk at the companies in which they invest.
Corporate governance codes require systems to assess and manage corporate risk:
 Turnbull Report UK governance codes 1999- attention to the importance of board-level risk assessment- includes principles on
boards’ responsibility for risk management, calling for an integrated approach to ERM.
 Sarbanes-Oxley Act US 2002- SOX mandates that corporate boards, particularly audit committees, are responsible for
ensuring effective risk management practices within the organization. This includes oversight of financial reporting and internal
controls to mitigate risks of fraud and financial misstatements.
 Basel ll agreement for the financial world 2003. (Basel Committee on Banking Supervision,)- ‘the bank’s board of directors has
a responsibility for setting the board’s tolerance for risks’. Basel III sets standards for bank capital adequacy, stress testing, and
liquidity risk management. It emphasizes the importance of board oversight in assessing and managing risks within financial
institutions.

The World Economic Forum risk survey

The 2018 survey identified environmental and technological risks as likely to rise, and geopolitical and societal risks overall as stable
but remaining high, while economic risks were perceived as low in terms both of likelihood and of impact.

The board’s responsibility for enterprise risk management

Risk management, not risk minimization, should be the theme. Boards have a specific and vital responsibility to recognize,
understand, and accept the risk profile inherent in their corporate strategies, what some people call ‘approving the company’s risk
appetite’.
Every board has a duty to ensure that:
1. the corporate risk profile is recognized;
  policies are established throughout the organization that reflect that profile;
 significant risks facing its company are recognized;
2. risk assessment systems exist and are effective throughout the organization;
3. risk evaluation procedures are developed and operational;
4. risk monitoring systems are robust, efficient, and effective;
5. business continuity strategies and risk management policies exist, are regularly updated, and are applied in practice.
Some boards include corporate risk assessment in the mandate of the board audit committee. However, audit committees can be
orientated towards the past, involved with audit outcomes and approving accountability information for publication, whereas risk
assessment needs a proactive, forward-looking orientation.
Consequently, other boards have decided to create a risk assessment or risk management committee as a distinct standing
committee of the board.
 Such a committee might have 4 or 5 members, wholly or mainly INEDs with appropriate business experience.
 Initially, when a company is building its risk management systems, the committee might meet quite frequently, but then two or
three times a year, reporting to the board as a whole.
 Members of senior management and external experts in risk are likely to be invited to attend to advise the committee.
Risk management committee
 Standing committee of main board or sub-committee of audit committee
 Chairman, CEO, CFO, INEDS plus attendance of CRO, profit unit heads, external experts
 Responsible for risk management policies, procedures, and plans
 Produces risk management plan for main board approval
 Meets 3 or 4 times a year or when facing exceptional risks
 Linked with internal and external audit.
Importance of Risk Management in Corporate Governance: Boards must understand critical areas where the company is exposed to
risk and develop relevant risk strategies and policies.
Value of Professional Enterprise Risk Management (ERM): Sophisticated investors around the world focus on the nature and extent
of risk in the companies and industries in which they invest. Companies that are recognized as having professional ERM and
transparent risk reporting are respected. Their shares can command a premium over those of competitors, and their overall cost of
capital is likely to be lower.
An alternative approach is for the board to form a management-based risk management group, perhaps including the CEO, the
CFO, profit-responsible division or unit heads, and the responsible risk management executive(s).
 A management-based risk management group needs to take a strategic view of corporate risk and not only from a
financial perspective.
 A management-based risk group might typically report to the CEO or CFO, but it is essential that its work is reviewed and
approved at board level.
Role of Chief Risk Officer (CRO): Many major companies appoint CROs to oversee company-wide risk assessment systems and
procedures. The CRO plays a crucial role in advising the board on risk issues and is often secretary to the risk management
committee.
 The global financial crisis led to a re-evaluation of risk governance in many institutions, with a shift towards empowering
CROs and the risk assessment function to rebalance power with risk-taking traders.
The risk management officer or chief risk officer
 A senior executive
 Reporting to CEO or CFO
 Responsible for working with the board risk management committee or audit committee
 Develops risk management policies, assessment methodologies, and infrastructure
 Oversees risk assessment and management procedures
 Produces risk management reports
 Liaises with insurers
  Keeps in touch with external risk management developments.
Significance of Risk Management in Financial Institutions: Risk management is particularly significant in financial institutions, with
the entire business model revolving around managing risk. Regulatory frameworks like Basel II and Basel III emphasize the board's
responsibility for setting risk tolerance and overseeing risk management frameworks.
According to the report, a risk policy committee to fulfil this requirement should have its own written charter, board representation
with at least three independent directors with the requisite skills and knowledge to oversee risk management, and a chair
appointed by the whole board. Basel III aim to strengthen the regulation, supervision, and risk management of banks
Challenges of Siloed Risk Management: In some companies, risk management remains siloed at the business unit level, with
responsibility primarily lying with middle management. This approach can hinder strategic risk assessment and management, leading
to operational rather than strategic risk considerations.
These points highlight the importance of robust risk management practices, the involvement of both board-level oversight and
management-level execution, and the role of regulatory frameworks in shaping risk governance within organizations.

Identifying types of risk

1. Strategic-level risks - threats from outside organization
2. Management-level risks- risks from the firm’s activities
3. Operational-level risks - hazards within the enterprise
External strategic threat Internal strategic and management- Operational risks and hazards (for each risk
level risks management department or unit)
 Competitors’ activities; customers’   Fire, explosion, flood; loss of power (e.g.
Board-level strategic failings;
activities;  lack of board-level security; inability to carry out trade)
 government and regulator activities;  management weaknesses;  poor cyber-security;
 economic, political, or social eve  fraud and misfeasance
Sage’s risk management strategy is therefore to support the successful running of the business by identifying and managing risks to
an acceptable level, and delivering assurances on this.
A board, having recognized potential catastrophic events that could put the very survival of the firm at risk, needs to have a business
continuity strategy to respond to such exposure.

Controlling risk:
1. risk recognition;
2. risk assessment;
3. risk evaluation;
4. risk management policies;
5. risk monitoring.

The Institute of Chartered Accountants in England and Wales (ICAEW) compiled a list of benefits from the introduction of sound
governance and risk management that included:
1. greater likelihood of achieving objectives;
2. higher share price in the long term;
3. greater likelihood of successful change initiatives;
4. lower cost of capital;
5. early movement into new business areas;
 6. improved use of insurance;
7. reduction in the cost of remedial work;
8. achievement of competitive advantage;
9. less business interruption;
10. achievement of compliance/regulatory targets.
Some commentators suggest that good corporate governance with professional risk management can reduce insurance costs. This is
not necessarily true, but good corporate governance can protect against excessive penalties and improve the ability to get cover,
even against substantial risks.

Risk recognition and assessment

Although some threats that could significantly harm a business may be obvious and easily guarded against, other risks can be hard to
recognize.
How do firms go about the task of identifying risk at every level? The vital element in corporate risk recognition is the creation of a
corporate culture that places risk at the centre of thinking throughout the organization. This can be achieved only with motivation
from the top: from the chair and the board.
 In-house workshops and seminars are used by some to generate insights.
 External experts may be able to offer experience and an independent view.
 The advice of INEDs can also be valuable.

A simple tabular approach

1. A simple tabular approach, identifying risk analysis centres and listing risks and effects
The documentation for the risk analysis programme should contain guidance to staff on the range of risks to be covered, including
likely effects or outcomes of each occurrence.
Vital to record risk factors

It is important that the risk analysis is conducted in each part of the organization and at every level. Experience shows that the initial
risk assessment report will trigger further ideas and insights, which improve the subsequent risk assessment
The simple narrative table can be turned into a A matrix with estimated costs and numerical probability estimates
A potential drawback of this approach is that a managerial focus might fail to identify strategic risks.
2. A questionnaire designed to identify risks and hazards. This format can also be used to document compliance and non-
compliance with risk management policies
3. Software programs developed to provide online identification and reporting of risks
4. Proprietary programs and systems, available form software houses and consulting firms.
5. Mind mapping- This involves a visual approach to recognizing risk factors, plotting their interrelationships, and then deriving the
possible implications.
Benefits can include an appreciation of the relationships between risks and the identification of different risk elements from those
generated by tabulation or questionnaire.
Various professional experts are available to assist in enterprise risk management:
1. Auditors (not experts in risk but in assessment of control systems)
2. Consultants (some specialize in this field)
3. Insurance brokers and companies (benefit of bench marks by industry, country, and company).
Critical success factors/ Experience has shown that a successful risk recognition and assessment programme has a number of critical
success factors, including
1. Sponsorship and oversight at board level
2. Top management commitment
 3. Involvement throughout management and in all parts of the enterprise
4. Company-wide definition of procedures, documentation, and reporting
5. Identification of risk management centres throughout the organization
6. Definition of responsibilities for identifying and recommending risk responses
7. Risk management centres are given appropriate responsibility
8. Areas of risk are carefully defined and bounded, each one limited in scope
9. Involvement of experts with relevant risk assessment experience
10. Document at all stages, regularly updated and building on experience
11. Define authentication and approval, confidentiality levels, access control, availability, audit, and overall administration
responsibilities
12. The creation of a risk awareness, not risk avoidance, throughout the organization
13. Ensuring participation by identifying ‘risk ownership’ throughout the organization
14. Board-level leadership and approval of risk management policies is vital

Risk evaluation
The extent of any risk (R) is a function of the magnitude of the potential cost or loss (L) and the probability (p) that the uncertain
future event will occur

Unfortunately, both the cost and the probability of some events can often be difficult to assess.
 Some costs, such as the loss of customer confidence should a product fail,
 the loss of reputation following a financial or executive scandal,
 or the effect on the cost of capital following the lowering of a credit rating, can be difficult to estimate
A risk that would result in a high loss, but with a low chance of occurring,
may well be treated differently in a firm’s risk management policies from
one with a lower cost, but greater probability.
In the high impact/high In the high impact/low In the low imp
likelihood quadrant, the likelihood quadrant, the probability qu
board will want to give a lot of board has the options of  the board
consideration to appropriate taking action to mitigate the defensive
policies. impact, assuming the risk, or  but may w
insuring. carry any f
itself.
Risk management information systems
Enterprise risk management systems (ERMS) provide information routinely and regularly for management to take executive
decisions, and for the board to carry out its monitoring and supervisory function.
The ERMS should also generate information to enable the company to communicate externally to auditors, regulators, shareholders,
and other legitimate stakeholders, as well as to its insurers and brokers.
However, because such systems hold masses of vital information, data protection, confidentiality, and cyber-security are vital.
There are a number of so-called ‘enterprise governance, risk and compliance platforms’ that provide technology-based
underpinning for ERMS.
A successful ERM system will provide an information interchange, with links throughout the company to the centre, and also link to
brokers and insurers.
Risk strategies
Board-level strategies that recognize strategic threats to the enterprise are vital, with policies agreed by the board to determine
which risk management decisions are reserved to the board
Policy options to enterprise risk management
In establishing the company’s risk policies, every board faces 4 possible responses to risk:

1. Avoid the risk. Do not commit to the planned action. Abandon the proposed project.
2. Mitigate the risk by making capital investments or incurring ongoing expenditure- preventive controls
3. Transfer the risk. insurance, hedging, outsourcing
Create derivative instruments—that is, agreements with financial institutions that transfer risk to third parties. Negotiate forward
contracts for the supply of goods and services.

4. Retain the risk. In other words, accept it. This risk strategy—what some commentators call the firm’s ‘risk appetite’—needs
to be made at board level.
Risk management policies typically involve costs: both capital costs and on-going expenditure, such as the cost of building hardware
and software systems into a company’s customer ordering system, to reduce opportunities for a sophisticated hacker to steal
information, damage system operations, or perpetrate fraud.
 Enterprise risk profiling, risk strategy formulation, and policymaking and risk supervision have now become integral parts of the
corporate governance portfolio.
 Every board has a duty to ensure that risk assessment and management systems are functioning at each level
 Moreover, regulators increasingly require firms to report on the quality of their risk management.
 Overall, boards that handle risk professionally,

Chapter 9: The Board and Business Ethics

What are business ethics?
All organizations develop their own culture, he culture reflects the way people in that organization are expected to behave; In many
cases business ethics are implicit, undeclared but evident to all who deal with that enterprise.
The directors and senior executives of every enterprise create the moral tone of their organization; what some call ‘setting the
moral compass’.
The Partnership is not subject to UK partnership law, which would give partners rights to ownership of a share of the partnership
assets and a vote in partners’ meetings. But channels are provided for employee partners to communicate with the governing
authorities.
The board is responsible for: Every board has a duty
1. considering the potential effect of the strategies it 1. to formulate the company’s strategy,
formulates, 2. recognizing the risks involved,
2. for identifying the likely impact of policies it approves 3. and part of that process involves determining how the
(both short- and long-term), company will behave—establishing how social responsibility.
3. for recognizing possible outcomes for people, and Balancing competing claims of different stakeholders, while
4. for accepting its duty to be accountable meeting shareholders’ expectations, can be quite a challenge.
Changing expectations in the governance of organizations
3 significant changes:
1. first, corporate governance compliance has increasingly become mandatory, enshrined in regulation, law, and stock exchange
listing requirements—complaints from companies now tend to be about the cost of compliance rather than the need for
corporate governance principles;
2. Risk governance and enterprise risk management have become an integral part of the corporate governance process;
3. CSR and sustainability
What responsibilities does a business have?’
A company has one and only one objective: to make long-term sustainable profits by satisfying customers for the benefit of
its owners, whilst acting within the law.
If society wishes to limit a company’s single-minded pursuit of this goal, for example by constraining monopolies, regulating
employment, or preventing pollution, it must pass appropriate laws.
Corporate responsibility has 4 levels
1. economic responsibility—first and foremost, the social responsibility to be profit-orientated and market-driven;
2. legal responsibility—to adhere to society’s laws and regulations as the price for society’s licence to operate;
3. ethical responsibilities—to honour society’s wider social norms and expectations of behaviour over and above the law in line
with the local culture;
4. discretionary (or philanthropic: responsibilities—to undertake voluntary activities and expenditures that exceed society’s
minimum expectations.
King Report (King 1) on corporate governance in South Africa was first to recognize the interests of corporate stakeholders as well
as shareholders.
that in the decision-making process you should take account of the legitimate needs, interests and expectations of stakeholders
linked to the company. That did not mean that directors should be accountable to stakeholders, but that they should take account of
stakeholder needs and expectations in their decision-making.’
Kofi Annan, when Secretary-General of the UN
‘We have to choose between a global market driven only by calculation of short-term profit, and one which has a human face;
between a world which condemns a quarter of the human race to starvation and squalor, and one which offers everyone at least a
chance of prosperity, in a healthy environment; between a selfish free-for-all in which we ignore the fate of the losers, and a future in
which the strong and successful accept their responsibilities, showing global vision and leadership.’

The concept of corporate social responsibility

6 Different perspectives on CSR:
1. The societal perspective
2. The strategy-driven perspective
3. The stakeholder perspective
4. The ethical perspective
5. The political perspective
6. The philanthropic perspective

1. The societal perspective

This view holds that companies have responsibilities beyond just obeying the law and paying their taxes, because their activities
have an overall impact on society. ‘CSR involves operating a business in a manner that meets or exceeds the ethical, legal,
commercial, and public expectations that society has of business’.

2. The strategy -driven perspective

This perspective starts from the proposition that business social responsibility is an integral part of the wealth-creation process, its
CSR strategies and policies are business-driven, in both the short and long terms, based on cost-effective criteria.
All corporate strategies—research, exploration, product development, production, marketing, human resources, and financial—are
contingent on the CSR objectives.
The business case for taking a stakeholder approach to corporate governance is that it enhances competitiveness, increases
customer satisfaction, improves employee relations, reduces the cost of capital, and enhances shareholder value, while also
investing in communities and increasing wealth creation in society.

3. The stakeholder perspective

Companies with this perception see CSR as the alignment of corporate values and actions with the expectations and needs of their
stakeholders—shareholders, customers, employees, suppliers, communities, regulators, other interest groups, and society as a
whole. Adopting this perspective, the European Commission has defined CSR as ‘a concept whereby companies integrate social and
environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis’.

4. The ethical perspective

The ethical viewpoint sees that corporate entities, like individuals, have an obligation to act for the benefit of society as a whole,
contributing to society while doing no harm to others. A wide range of laws and guidelines that steer and control corporate behavior
already exist at state, national, and global levels on health and safety, human rights, environmental issues, and sustainability. The
board needs to be the conscience of the company—responsible for establishing its corporate values. Ethical codes, understood
throughout the organization, reflect the directors’ own behavior. An ethical standpoint is likely to produce voluntary CSR policies
that go well beyond the requirements of laws and guidelines.

5. The political perspective

Interest groups, some with an anti-business agenda, argue that CSR is primarily motivated by self-interest
Some have called for legislation to impose standards of CSR on companies, particularly multinationals.
The response from the Confederation of British Industry (CBI) was that CSR should remain market-driven and voluntary.
Attempts to raise standards, the CBI believes, would remove the competitive incentive that drives CSR activity and would place
an unmanageable burden on companies, particularly small and medium-sized firms.
CSR policies should reflect companies’ activities and the context in which they operate, while legislation in this area would
constrain business activity and reduce CSR to a lowest common denominator, the CBI said.
6. The philanthropic perspective_
For many years, some companies have sought to ‘put something back’ into the society that provided them with customers,
employees, and success. Such corporate philanthropy may involve charitable giving to support communities, charities, or other
causes, in money or corporate services, such as employees’ time. Donating to charitable causes without anticipating any reward,
save perhaps a reputational benefit, has long been practiced in the United States, some European countries. But CSR practices vary
between countries and cultures. Different value systems, different economic conditions, and different social priorities mean that no
‘one size’ can ‘fit all’.

CSR strategies and policies

A primary duty of the board is to identify the aims of the company, to establish its mission, and to set its values.
To be effective, a company’s CSR efforts need to be led by the directors and embedded in its corporate strategy.
CSR policy determines how the company engages with its shareholders and the other stakeholders.
A clear CSR policy can also influence potential investors looking for socially responsible, ethical, or environmentally friendly
enterprises in which to invest.
Successful CSR policies influence management decisions at all levels

The CSR competency framework

To encourage commitment to CSR practices, the British government created a CSR competency framework—a flexible tool, which is
offered as a ‘way of thinking’ for companies of all sizes. The framework offers 6 core characteristics, with 5 levels of attainment for
each:
6 core characteristics
1. Understanding society—a knowledge of how the business operates in the societal context and impact of the business has on
society.
2. building capacity—helping suppliers and employees to understand your environment and to apply social and environmental
concerns in their day-to-day roles;
3. questioning ‘business as usual’—constantly questioning your business in relation to a more sustainable future and being open
to improving people’s quality of life and the environment, acting as an advocate, engaging with bodies outside the business who
share this concern for the future;
4. stakeholder relations—recognizing that stakeholders include all those who have an impact on,
5. strategic view—ensuring that social and environmental concerns are included in the overall business strategy so that CSR
becomes ‘business as usual’
6. harnessing diversity—recognizing that people differ and harnessing this diversity, reflected in fair and transparent employment
practices
The 5 levels of attainment are:
1. awareness—how they might influence on business decisions;
2. understanding—a basic knowledge of some of the issues;
3. application—the ability to supplement this basic knowledge of the issues
4. integration—an in-depth understanding of the issues and an expertise in embedding CSR into the business decision-making
process;
5. leadership—the ability to help managers across the organization in a way that fully integrates CSR in the decision-making
process
Overall, the intention of the CSR framework is to change employees’ mindsets and to promote an appropriate CSR strategy
throughout the organization and between the company and its stakeholders.
An organization’s response to its social and environmental impacts, recognized through CSR awareness, can provide a cost effective,
yet comprehensive, way of managing social and environmental risk across an organization

Enlightened shareholder value (ESV)

Boards adopting an investor-driven, ESV approach believe that the satisfaction of the needs of all stakeholders is crucial to
corporate success, that it is essential to creating value for shareholders.
The ESV concept of corporate governance attempts to overcome conflicts between a shareholder-focused and a stakeholder-
focused approach.
Increasing demands for CSR reporting:
UK Companies Act (2006) introduced CSR criteria for directors:
‘A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the
company for the benefit of its members as a whole, and in doing so have regard to:
the likely consequences of any decision in the long term
the interests of the company’s employees
the need to company’s business relations with suppliers, customers and others
the impact of the community and the environment
reputation for high standards of business conduct
the need to act fairly as between members of the company.’

1. The UN Principles for Responsible Investment also call for companies to consider environmental, social, and governance (ESG)
issues and risks in their strategic decision-making and to report their participation on a ‘comply or explain’ basis. These
Principles reflect the increasing relevance of environmental, social, and corporate governance issues to investment practices.
2. UK Occupational Pension Funds (the UK Department for Environment, Food and Rural Affairs) DEFRA (2001)- ‘Report whether
environmental, social and ethical criteria are taken into account in investment strategy.
3. The Australian Securities Exchange listing rule that requires companies to report their performance under environmental
legislation (1998).

Sustainable development
The World Business Council for Sustainable Development (WBCSD) concluded in its first report on CSR, ‘Meeting Changing
Expectations’ (1999), that:
1. CSR priorities today are human rights, employee rights, environmental protection, community involvement, and supplier
relations
2. A coherent CSR strategy, based on integrity, sound values, and a long-term approach, offers clear business benefits
3. Companies should articulate their own core values and codes of conduct, or, failing that, endorse and implement codes
produced by others
4. Emphasize the importance of being responsive to local and cultural differences when implementing global policies.
Some firms have claimed that their CSR policies and reports have:
improved brand recognition and reputation;
made the firm more attractive to existing and potential employees;
improved top management and board-level strategic thinking and decisions;
produced innovations in the way in which the firm operates;
responded to customers’ demands;
 met stakeholders’ and society’s changing expectations.
For such reasons, many firms approach CSR as enlightened self-interest.
In addition, CSR reports can build new links between companies and their stakeholders as relationships between companies and
their contractual partners, such as suppliers, distributors, and customers, are enhanced. Employees and their trades unions are also
provided with an additional focus in their relations with the employer
A 2011 ISO standard on social responsibility marked a significant development in the international recognition of the
importance of CSR and sustainable development.
ISO26000 calls on companies to govern and manage their affairs with equity, honesty, and integrity, respecting the interests of
all stakeholders affected by the company’s activities. The standard seeks to promote ethical behaviour by requiring the:
 ethical conduct;
 identification, adoption, and application of these standards of ethical behaviour;
 establishment control systems;
 identification and reporting appropriate action.
The World Commission on Environment and Development was convened by the United Nations in 1983 and called the Brundtland
Commission.
The Commission was created to address growing concern ‘about the accelerating deterioration of the human environment and
natural resources and the consequences of that deterioration for economic and social development’.
The Commission defined sustainable development as ‘development that meets the needs of the present without compromising the
ability of future generations to meet their own needs’
Some companies, which support sustainability, talk about their triple bottom line, striving for sound performance in three areas—
economic, social, and environmental. Some add ‘in the long term’ , recognizing that it is possible to achieve acceptable short-term
results, but to leave business successors and future generations with inherited problems.
Some examples of states’ recognition of the need for sustainable development include:
1. China’s Guangdong Province requiring companies that pollute the ground water table to clear up or close down
2. The European Union establishing fishing quotas and other fishing limits to sustain fish stocks
3. South American and European Union controls on forestry products to protect the rain forest and to ensure that woodland is
sustained by replanting
4. Since 1997 190 nations, representing half the world,s greenhouse gas emissions, have ratified the Kyoto Protocol, committing to
reduce the world's greenhouse gases below 1990 levels by 2012 and ultimately to reverse the greenhouse effect.

Communication with stakeholders: integrated reporting

Calls for companies to report on their non-financial performance are growing. This includes their CSR and sustainability activities,
and the effects they have on the societies in which they operate. Such ESG reporting, as it is sometimes known (environmental,
social, and governance) has become a significant issue in the business world .
The concept of "integrated reporting," introduced by South Africa's King III code (2008), mandates companies to disclose their non-
financial performance alongside financial results. The Johannesburg Stock Exchange requires listed companies to publish these
integrated reports. Denmark also mandates major companies to include non-financial performance in their annual reports. Similarly,
the UK encourages a business commentary to accompany financial results. In 2014, Hong Kong implemented a statutory business
review, requiring companies to analyze their environmental policies, performance, and key relationships with employees,
customers, suppliers, and other significant stakeholders.
The International Corporate Governance Network (ICGN) issued a statement in 2009 emphasizing the importance of non-financial
business reporting.
 The ICGN argues that disclosing relevant and material non-financial information is crucial for shareholders and investors to
make informed decisions.
 Non-financial information pertains to economic value but falls outside the traditional accounting framework.
 Given the fast-paced, globalized world, investor-relevant information is increasingly varied and dynamic.
 Long-term business success now depends more on managing economic, environmental, and social factors, many of which are
not captured in financial statements and are sometimes considered beyond the corporation's immediate concern.
In preparing an integrated report, a number of issues need to be considered:
1. Who the report is intended for
2. why are you publishing this report, what story do you want to tell;
3. what material should be included:
 business strategic achievements
 governance reporting
 Remuneration reporting, HR information
 environmental information
4. does the information provided meet the minimum requirements for reporting?
5. avoid the criticism
6. level of detail and writing style appropriate
7. is it interesting?
8. how and where should the report be published—

The United Nations Global Reporting Initiative

The UN Global Compact is a strategic initiative for businesses that commit to aligning their strategies and operations with ten
universally accepted principles (the Ten Principles) in the areas of human rights, labour, the environment, and anti-corruption.
The United Nations Environment Programme Finance Initiative (UNEP FI) is a unique global partnership between the UN and the
financial sectors around the world. The programme has developed a set of statements covering the environment and sustainable
development that participating organizations accept. By signing up to these statements, the financial institutions recognize the role
of the financial sector in making economies and lifestyles sustainable, and commit to the integration of environmental
considerations into their operations
The Global Reporting Initiative (GRI), which was sparked by the UN Global Compact, is a worldwide, multistakeholder network
aiming to create and develop a sustainability reporting framework, in which business, civil society, labour, investors, accountants,
and others collaborate.
 The GRI is based on the underlying belief that reporting on economic, environmental, and social performance by all
organizations should be as routine and comparable as financial reporting.
 The GRI facilitates transparency and accountability by organizations of all sizes and sectors across the world—companies,
governmental and other public agencies, and non-profit entities
 disclosure about sustainability performance
Three types of standard disclosure are included:
1. the organization’s profile—information that sets the overall context for understanding the organization’s performance,
including its strategy, profile, and governance;
2. the organization’s management approach—information about the organization that provides the context for understanding its
performance;
3. performance indicators—which provide information on the economic, environmental, and social performance of the
organization.
Swire Pacific’s sustainable development policy
 Group adopts decentralized approach
 Board of Swire Pacific accepted 2007 UN Environment Agency Report on Global Environmental Outlook:
‘We appear to be living in an era in which the severity of environmental problems is increasing faster than our policy responses. To
avoid the threat of catastrophic consequences in the future, we need new policy approaches to change the direction and magnitude
of drivers of environmental change and shift environmental policy making to the core of decision making.’
 Recognizing global warming problem would impact the development of their businesses, board endorsed sustainable
development programme throughout group
Chapter 10: Governance of Listed Companies
Ownership of listed companies
Contrast the potential differences of shareholder power in the following cases:
1. A listed company with shares widely spread between many individual and institutional shareholders
2. A listed company dominated by institutional shareholders
3. A listed company with a single majority shareholder
4. A listed company in which some large shareholders form a block
5. A family company, listed with outside shareholders but with a majority of voting shares in family hands
6. A company which is listed still run by the founder
7. A company which is listed but is the subsidiary of another company.
We tend to think of a direct relationship between shareholder and company, in reality there can be a complex chain of intermediaries
acting as agents. For example, the ultimate owner of a share could be an individual:
1. the ultimate owner is an individual who invests in a private pension fund,
2. which invests some of its funds in a hedge fund,
3. which in turn invests in a fund of funds to hedge its risk,
4. which invests in a commercial property fund,
5. which places some of its funds in the hands of a financial institution,
6. which invests ultimately in a listed company,
7. but lends the shares as collateral for a deal it has made
Public companies, those listed on the stock market, face significantly more demanding governance standards than those applying to
private companies, through legislation and regulation, corporate governance codes, and the listing rules of the stock market.
Companies planning a stock market listing, probably through an IPO (initial public offering), need to position themselves carefully
beforehand. Among the things that need to be considered include
1. to meet the requirements of listing rules;
2. ensure the chair of the board is confident and competent in the role—chairing a board with outside directors, with divergent
experiences and views, can be quite different from the close-knit consensus of a private company board;
3. seek advice from corporate auditors and lawyers, particularly from compliance and governance specialists, and from the
financial institution leading the IPO;
4. consider the board structure, consider board diversity
5. ensure that existing directors have the appropriate knowledge, time, and enthusiasm to serve on the board of a quoted
company;
6. create the required board committees,
7. board-level remuneration and review policies;
8. consider board succession, director training and development, and director and board evaluation methods; develop the
required reporting routines and shareholder interaction processes well ahead of time;
9. develop the board reporting systems

Shareholder rights
Although the details obviously vary between countries, ownership of a share broadly provides the right to:
1. have your details in shareholder members’ register
2. receive notice of all shareholder meetings
3. receive the formal company accounts, directors’ and auditors’ reports, and other statutory notices
4. attend all shareholders’ meetings
5. vote, either in person or by proxy, at shareholder meetings
6. view the company’s statutory records, including the register of members; the register of loans charged against the company’s
assets; the register of directors, officers and company secretary; and the register of their share interests
7. receive dividends that have been duly declared for that class of share.
Shareholders do not have a right to:
 1. attend internal meetings of the company
2. access management accounts or other corporate information
3. get involved in management matters.
In shareholders’ annual general meetings (AGM) decisions made by simple majority of the members voting in person or by proxy
include the:
1. approval of the accounts presented by the directors
2. approval of the re-appointment of auditors
3. appointment and re-appointment of directors.
4. payment of dividends proposed by the directors
5. approval of transactions between company and connected persons
Longer notice may be required for resolutions to:
 remove a director;
 remove an auditor during their term of office; appoint an auditor other than the retiring auditor
In 2007, the European Union (EU) published a Shareholder Rights Directive, to improve shareholders’ rights and solve problems in
the exercising of such rights across borders in the member states
The directive applies to companies whose shares are traded on stock markets in the European Economic Area.
In 2009, UK Companies (Shareholder Rights) Regulations implemented the EU Directive
 Shareholders acquired the right to ask questions at shareholder meetings, which companies must answer unless they can show
that disclosure would not be in the company’s interest
 Companies must provide a website, with information relevant to shareholders’ interests, including their right to ask questions
and how to vote.
 Holders of at least 5 per cent of the voting shares can now requisition a shareholders’ general meeting
 also clarified the way in which companies count proxies when using a ‘show of hands’

Shareholder activism and the role of institutional investors

In the 19th-century model of the company, shareholders were individuals and met with the directors periodically at company
meetings. Shareholder democracy, with one share-one vote, reflected power of ownership.
But today, in most listed companies:
• the shareholders are numerous, geographically spread, and have different expectations of the company
• shareholders include corporate institutional investors as well as individuals shareholder democracy, one share-one vote,
no longer provides shareholder power
Dissatisfaction with boards has increased in recent years, with concerns
 over poor corporate performance,
 allegedly excessive directors’ rewards,
 loss of investor confidence following downturn in markets, and company collapses.
However, institutional investors can wield more power. Even though their shareholding is relatively small, they can have a more
significant influence, particularly if they act in concert with their activities coordinated.
Many institutional investors now receive voting guidelines from their representative organizations.
In the United States the incidence of activist shareholders threatening or initiating proposals for the nomination and election of
directors has increased significantly.
Activist calls for shareholder-sponsored directors to public company boards are also receiving support from financial institutions.
Activist shareholders can now be a potential risk for incumbent boards by proposing their own nominees (what some commentators
refer to as ‘short-slate’ elections) and boards need to consider their policies in response to such activism.
In the UK, shareholders do have the right to have resolutions put on the ballot and, if successful, these are usually binding on the
directors.
Impact on Directors' Careers:
 Directors are nearly twice as likely to leave within two years following a shareholder activist campaign.
 Directors receiving lower shareholder support on re-election are more likely to leave within the year.
 Departing from boards due to activism does not impact their standing on other boards.
Forms of Shareholder Activism:
 Direct communication and negotiation with management.
 Media campaigns, blogging, proxy battles, shareholder meetings, and litigation.
 Advancing social, environmental, or other agendas through shareholding.
 Hedge fund managers acquiring voting power to nominate directors and protect their interests.
 Influence of controlling block-holders in some countries, though this is decreasing with deepening stock markets.
Debate on Shareholder Activism:
 Activism is seen as leading to a struggle between shareholders and management.
 Some directors prefer the past passive shareholder approach.
Arguments against activism include:
 Elected directors should have the freedom to act without being second-guessed.
 Separation between shareholders and management is crucial for governance.
 Activism may push boards to focus on short-term goals, neglecting long-term strategies.
 Institutional investors face their own governance challenges and must balance varied investor aims.
Corporate Response:
Most listed companies now acknowledge the importance of maintaining close, positive relationships with their investors.
But shareholder activism can be controversial
 Shareholders, having elected their directors, should allow them freedom to act without having their business decisions second-
guessed
 Separation between shareholders and top management, it is argued, lies at the heart of the governance system.

Investor relations
Proactive shareholder-relation activities provide a two-way channel of information, informing both existing and potential
shareholders, securities analysts and the financial community, and the company.
Shareholder-relation activities take many forms, including interactive websites, newsletters, shareholder meetings, press
conferences, as well as meetings with individual shareholders, to resolve questions and explore issues about the company’s
strategies, policies, and financial standing.
Indeed, moves towards paperless relationships between companies and their shareholders, which some call ‘dematerialization’, is
progressing, although some shareholders remain to be convinced.
In the United States, the Sarbanes-Oxley Act of 2002 increased the emphasis on investor relations by demanding greater corporate
transparency, compliance, and enhanced financial disclosure, with board-level responsibility for financial reports.
In the UK, the Financial Reporting Council requires companies to explain to their AGM how they intend to engage with shareholders
when a significant percentage of them have voted against any resolution.

Disclosure of substantial shareholdings and directors’ interests

 Most jurisdictions and many stock exchanges require the disclosure of shareholders with substantial interests in listed
companies
 Disclosure is usually required of directors’ dealings in their company’s shares, to dete directors from benefiting from insider
knowledge they have of the company’s affairs.
In Singapore, the Companies Act requires a substantial shareholder of a listed company holding 5 % or more of the total
shareholder votes, whether resident in Singapore or not, to disclose their interests in the voting shares.
In 2013, the UK introduced proposals to enhance the transparency of UK company ownership and increase trust in UK business.
These proposals required companies to maintain a registry of companies’ beneficial owners, showing who owns and
controls them.
The proposals also stopped the issue of bearer shares, which do not provide details of the owners.
Corporate directors were also prohibited, so that directors would be real people, not other corporations.

 Public disclosure is often required of directors’ dealings in their company’s shares. Such information is intended to deter
directors from benefiting from confidential inside knowledge they have of the company’s affairs
 Insider dealing (or insider trading) is the buying or selling of shares on the basis of information that is not yet available to the
stock market. It is now illegal in almost all jurisdictions, although some countries were slow to criminalize the activity .

The governance of complex corporate structures

Thus far we have looked at governance issues in simple corporate structures in which there is one corporate entity, one governing
body, and one set of shareholder members.
Complex corporate structures can be grouped into 3 broad categories:
 pyramids, in which the holding company sits on top of a pyramid of subsidiary and associate companies;
1. Holding Company
This entity typically does not engage in direct business operations. Instead, it owns a significant portion of the shares in other
companies, providing it with control and influence over them.
2. Subsidiary Companies
These are companies in which the holding company holds more than 50% of the equity shares. This majority ownership gives the
holding company the right to control the subsidiary's operations and make key decisions. Subsidiaries can themselves own other
subsidiaries, creating multiple layers within the pyramid.
3. Associate Companies
These are companies in which the holding company has a significant influence but does not have direct control. This usually means
owning between 20% and 50% of the voting shares. While the holding company cannot dictate operations, it can influence major
decisions and policies.
 chains, in which one company or shareholder group holds an interest in a string of companies;
Chains refer to a corporate structure where a single entity or group of shareholders owns interests in multiple companies that are
connected or operate in a sequential manner. This structure allows for a degree of control and influence over a series of companies,
often enabling strategic coordination, resource sharing, and streamlined management across the chain.
However, they also present challenges in management complexity, regulatory compliance, and financial reporting. Properly
managed, such structures can drive significant value and efficiency across the interconnected businesses.
 networks, in which a set of companies owns shares in each other.

The governance of pyramid structures

The corporate pyramid is the most straightforward organizational form for a group of companies.
 It is the structure found most frequently in practice, and
 is widely used by both private companies and public listed companies.
 the structure widely used by international groups that own companies incorporated in a number of countries.
Why should a holding company adopt a pyramid structure, rather than operate through a single entity?
1. First is strategic positioning: a group structure can be used to set boundaries around identifiable parts of the enterprise in
line with the group’s corporate strategy
 2. to adopt a pyramid structure could be legal: operating through a company incorporated in the country of operation often
simplifies legal and regulatory aspects, including business regulation, contracting, employment, taxation, health and safety
regulation, and so on.
3. taxation: there can be significant tax benefits in operating through companies registered in countries where the taxation
regime is lower than elsewhere.
4. creating separate limited-liability companies, is an attempt to reduce the group’s exposure to the debts of any member
company. the shareholders of a company are not liable for its debts.
5. provide a legal home for a non-trading activity or to preserve a name. Such companies are sometimes called ‘letter box’
companies. Some companies in a group could be dormant—that is, they are not trading—but are not wound up in case they
are needed in the future
6. Management control.
So, what are the corporate governance implications of a group operating with a pyramid structure?
Every company within a group must comply with the legal requirements of its incorporation jurisdiction. Listed companies must also
meet the listing requirements of their respective stock exchanges. This generally entails each subsidiary and associate company
having its own officers and board of directors, maintaining its own financial records, filing necessary company reports, and
sometimes undergoing an audit.

The governance of chain structures

The corporate chain is, as the name suggests, a group of companies in an ownership chain. The head of the chain may be another
company, a group of investors such as a private equity fund, or an individual. Companies in the chain may be public and listed
companies or private companies.
Why is the chain structure adopted?
The answer is simple: those controlling the head of a chain can influence management decisions in the other companies in the chain.
With the leveraged power gained from gearing, the head of the chain is able to exercise more influence over the companies in the
chain than by investing in each individual company. A chain of companies may also offer a defence against predators, because the
companies in the chain have some protection from the gearing.
What are the governance implications for the directors serving on the boards of companies in a chain?
 Primarily, directors of such companies must fulfil their duties to their company under the company law, the regulatory
regime, and, where listed, the stock exchange.
 But, inevitably, with a dominant shareholder at the head of the chain, the companies in the chain have to respond to the
requirements of that shareholder
 nominee directors- must also respect the interests of the other shareholders in their company, including any minority
shareholders.
Chain structures are found in many countries: family interests

The governance of network structures

a network structure is one in which the member companies form a network of cross-holdings, each company being a node in the
network. One or more companies may be dominant or there may be no dominant member.
Why do groups of companies operate in networks?
1. First, strategic links can be created between companies that cooperate operationally
2. companies may network to provide mutual protection, minimizing the chance of hostile predators. With a cross-holding of
shares, a potential hostile bidder has a built-in disadvantage in acquiring enough shares to pursue a bid.
3. Third, networks may be formed to raise funds through equity or loan financing. Pyramids and chains of companies may be
buried within the network.
4. Fourth, networks can be used for taxation avoidance. Networks can also be used to provide anonymity for the ultimate owners
of companies.
5. Fifth, networks can be formed to share risks between companies, part of a strategy to reduce exposure to business risk.
6. Sixth, networks can arise as the unintentional effect of corporate acquisition activity.
7. Finally, complex networks can arise as the result of deliberate obfuscation, to reduce a group’s visibility, perhaps to confuse
competitors, to deter predators, or to avoid the unwanted interest of the authorities. Such network designs may push at the
boundaries of legality, for example in taxation, exchange controls, corporate reporting, or money laundering

Block-holders and universal ownership

If a few investors own a significant proportion of the voting shares in a company, and act together, they form a shareholders’ block
Acting as a block they could influence corporate decisions, on for example:
 corporate strategy including acquisition policy
 appointment or dismissal of directors
 financial strategy including dividend policy
 capital restructuring
In Italy voting trusts or syndicates (patti di sindacato) are groups of large shareholders who sign an explicit legal agreement to vote
together.
Such voting trusts can:
 ensure continuity and stability in management strategies and policies
 prevent conflicts of interest between large shareholders
The recently developed terminology of ‘fiduciary capitalism’ recognizes the potential power of financial institutions to take
collective action reflecting the interests of the ‘universal owners’. For example, some of the largest pension funds are those of
employees in local and state government, teachers, universities, and other public sector organizations.
Advocates of ‘universal ownership’ recognize the potential for pension and other funds to improve governance and long-term
returns by working together, although each holds only a relatively small percentage of the total shareholding.
The idea of universal ownership is most significant where equity holdings are highly diversified and lack a dominant investor.
Agents have agents, each acting as the agent for the next principal in the chain, with highly diversified roles, but all bound in law by
the fiduciary duty of loyalty and care. But their actions are neither transparent nor accountable.

Dual-listed companies
In a dual-listed company, by contrast, a group structure is created in which two listed companies merge, but both continue to exist
and share the ownership of a single operational business.
 The group maintains its two separate stock exchange listings, with different shareholders typically in different countries.
 A complex set of contracts defines their relationship with an integrated top management structure and the same directors
or some cross-directorships.
Benefits of dual listing include:
1. continuing existing successful businesses
2. protecting brand names
3. taxation benefits
4. sustaining national pride
Disadvantages include:
1. conflict between the two managements
2. disagreements between the boards
3. legal difficulties in applying the inter-company contracts
4. challenges from shareholders about unfair benefits
5. taxation difficulties, including transfer prices for inter-group trading
6. problems if the group wants to unravel the dual-listing agreements.

Dual-class shares
The corporate constitution of some companies (typically, the articles of association) provides for two or more classes of voting
shares in which one class enjoys greater voting rights than the other class, or all of the voting rights.
Dual-class shares are often issued to protect the ownership power of a dominant shareholding class, often a family, when a
company is floated on the stock market.

Listings on alternative stock markets

Some stock exchanges create a second market, often called a second board, to enable smaller, perhaps riskier, companies to raise
capital. Although many Alternative Investment Market (AIM) companies are businesses at an early stage of development and may
operate in high-risk sectors, the failure rate on AIM has been relatively low.
Unlike the main board, AIM does not stipulate a minimum size or market capitalization.
The regulatory regime for AIM companies is also less stringent than that of the main board, although regulated under EU and British
law.
A crucial element in the corporate governance of AIM companies is the nominated adviser (usually referred to as the ‘nomad’),
authorized by AIM, which all AIM companies are required to appoint.
 The nomad’s experience provides a quality control mechanism by checking the company’s plans and certifying to the Exchange
that the company is suitable and ready for listing.
 The nomad assists the company during the flotation, subsequently ensures that it meets its governance obligations, and handles
any on-going market issues. The company deals with AIM through its nomad, who advises AIM on all regulatory matters.
Growth Enterprise Market (GEM) advertises itself as a ‘buyers beware’ market for informed investors, emphasizing that emerging
companies carry a high investment risk, with potential market volatility and no assurance that there will be a liquid market.
Companies listing on GEM are not required to show a track record of profits, or to forecast future profitability. The initial listing
document must show the business objectives and activities.
The GEM is often used by Hong Kong family-based companies to enable family members to capitalize on the wealth in the family
business, as well as to provide additional funds for corporate growth

Chapter 13: Board Membership: Directors appointment, roles, and

remuneration
The appointment of directors
How directors are appointed
The nomination committee is a standing subcommittee of the main board, made up wholly, or mainly, of independent non-
executive directors, called on to recommend new directors. Relying on independent directors is intended to avoid a dominant
director, such as the chair or CEO, pushing through his or her own preferred candidates.
 The independence of outside directors on nomination committees can be compromised if they are selected by and have long-
term relationships with the chair, leading to a bias in supporting the chair's candidates.
 Additionally, nomination committees must address calls for increased board diversit.
Shareholders in publicly listed companies generally lack the ability to influence the nomination of new directors unless they possess
a significant portion of voting shares.
Director appointments can arise:
1. On re-appointment at the expiry of a director’s term of office;
2. To fill a vacancy;
3. On the creation of an additional directorship;
4. On the initial incorporation of a company.
Legally, shareholders have the right to appoint directors in a joint-stock, limited-liability company. However, in practice, current
board members often nominate potential directors, and shareholders confirm them. Corporate governance codes require board-
level nomination committees to propose candidates for board and shareholder approval. Recently, shareholder resistance,
especially from institutional investors, has increased. Where permitted, alternative nominees can be added to the slate, with proxy
votes solicited for support. In non-listed and family companies, the power to nominate directors usually remains with the incumbent
board.

The rotation of directors

Companies’ articles of association define directors' terms of service and re-election schedules.
A staggered board of directors (also known as a classified board) is a board that is made up of different classes of directors with
different service terms. Staggered board terms are structured by the company and commonly include three classes of directors. The
staggering of classes can be done simply to assign staggering service terms, or it may involve more detailed provisions and
responsibilities for each class.
Elections are held when terms expire, with a one-year classification requiring voting each year.
 preserves experience
 provides stability
 produces a longer-term strategic horizon
Critics of these so-called ‘staggered’ or ‘classified’ boards complain that, in an underperforming company, directors become
entrenched.
 Further, because the entire board cannot be replaced at a single election, staggered boards effectively block hostile takeover
bids, and can be used as a takeover defence.
 Annual election of all directors allows a change of control through a single successful proxy contest

The size of boards

1. articles typically provide for upper and lower limits
2. some company law provides limits
 e.g. prohibiting boards with a sole director
 requiring directors to be real persons not other companies
3. seldom argued that a board is too large
 lack of cohesion
 more difficult to reach consensus
 formation of cliques or cabals
 reduced opportunity for each director to contribute

Retirement, disqualification, and removal of directors

Many articles of association also have rules on directors’ ages, calling for shareholder approval.
 a minimum age on appointments to the board, frequently 16 or 18.
 upper age limit on directors, often 70
Company law has provisions for director disqualification
 bankruptcy
 mental illness
 disqualification by courts- guilty verdict of an offence in running a company, corrupt business behaviour…
members can propose a resolution calling for the removal of directors, and seek a shareholders’ meeting to consider this resolution.
 Much depends on the voting power of the recalcitrant shareholders.
 The incumbent board may resist, adopt delaying tactics, and circulate contrary information at the company’s expense, while
requiring the challenging shareholders to cover the costs of their campaign.
How are directors appointed?
1. in private companies: decisions taken by dominant shareholders
2. In public listed companies:
 nomination committee of board makes recommendation
 board agrees
 proposal put to shareholders
 shareholders vote
3. Criticism that boards become self-perpetuating
 shareholders have little opportunity to make nominations
 proposals to make shareholder nominations easier.

Desirable attributes in a director

1. Integrity -
Distinguish right from wrong and judge corporate behaviour accordingly
Recognize and declare a conflict of interest
Act in the company interest, not self-interest or personal gain
acting honestly, trusted
2. Independence –For Independent Non-executive Directors (INEDs)
- having no interest in the company that can affect or be seen to affect the exercise of independent, objective judgement
For Connected Non-executive Directors (CNEDs) and Executive Directors (EDs)
being able to recognize the nature and extent of interests in the company
being able to exercise independent judgement, doing what is right for the company despite personal or other interests.
3. Intellect - they call having ‘a good mind’. It combines an appropriate level of intelligence, the ability to think at different levels
of abstraction, and the imagination to see situations from different perspectives, rather than always seeing things from a fixed
viewpoint. A sound intellect is able to exercise independent judgement, to think originally, and to act creatively.
4. Character - Character traits, what some call ‘strength of character’, include being independently minded, objective, and
impartial. A director needs to be capable of moving towards consensus. a director needs to be tough-minded and resilient, with
the courage to make a stand. Further, a director needs to be results-orientated, with a balanced approach to risk— neither risk-
averse nor rash.
5. Personality - Desirable personality traits in a director include the ability to interact positively with others, which from time to
time may call for openness, flexibility, sensitivity, diplomacy, persuasiveness, the ability to motivate, and a sense of humour.
Such interpersonal abilities are particularly important in interactions with the chair and boardroom peers. Other desirable
personality traits include being a sound listener and a good communicator.

Further attributes of a successful director

Successful directors look ahead, anticipate problems, and can articulate possible solutions. They are open, welcome
questioning, and seek feedback. But they also listen, try to understand others’ points of view, and seek consensus. Overall,
they are reliable and trusted by their chair and peers
Lord Nolan’s seven principles of public life
1. selflessness – holders of public office should serve the public interest, not seek gains for their friends
2. integrity – they should not place themselves under financial obligation to outsiders who might influence their duties
3. objectivity – they should award public appointments and contracts on merit
4. accountability – they should submit themselves to the appropriate scrutiny
5. openness – they should give reasons for their decisions
6. honesty – they should declare conflicts of interest
7. leadership – they should support these principles by personal example.

Core competencies of a director

each director brings a different set of experience, skills, and knowledge to the board.
1. The essential director-level skills include:
strategic reasoning, perception, and vision;
quantitative and quality of analysis and financial interpretation;
planning and decision-making capabilities;
communication and interpersonal skills;
networking and political abilities.

2. Essential director-level experience supplements the knowledge available to the board

for example, additional experience about financial reporting standards, corporate governance, board procedures,
strategy formulation, and policy-making
or experience of overseas markets, frontier technologies, international finance.
3. Knowledge
Directors need appropriate knowledge of the enterprise, its business and board-level activities, as well as relevant
information about the company’s political, economic, social, and technological context
Knowledge of the company involves a clear understanding of:
(who are shareholders, where does power lie to appoint directors)
The governance rules and regulations
The board structure, membership, and personalities
The board processes, such as the use of board committees and the basis of board information
An awareness of the history.
Knowledge of the business involves an understanding of:
The basic business activities and processes
Its purpose and aims
Its strengths and weaknesses
How it measures success
including markets and competitors)
The structure of the organization, its culture, management, and people,
Management control and risk management systems.
Knowledge of the financials involves an understanding of:
How the company is financed
The essence of its annual accounts and directors’ reports
key financial ratios
Criteria used in investment appraisals
Calibre of financial controls
Who the auditors are

Roles directors play

Some of these roles contribute to the performance aspects of the board’s work (strategy formulation and policy-making); others
contribute to the conformance aspects (executive supervision and accountability).
Performance-orientated roles that directors play:
1. Bringing wider business and board experience to the identification, discussion, and decision-making—identifying issues of
board-level. As the Cadbury Report put it, ‘the board should include non-executive directors of sufficient calibre and number for
their views to carry significant weight in the board’s decisions’.
2. Adding specialist knowledge, skills, and know-how to board deliberations. A director uses their professional training, skills, and
knowledge to contribute to the board, with specializations potentially in accountancy, banking, engineering, finance, law, or
specific market or functional areas like marketing or manufacturing. In newer, growing companies, outside directors may be
appointed for their expertise until the company can acquire these skills in-house. It's crucial for such directors to stay current in
their fields, which can be challenging at the board level.
3. External information for board discussions —a window on the world for other directors. Usually, this will be on matters
external to the company, such as insights into market opportunities, new technologies, industry developments, financial and
economic concerns, or international matters.
4. Being a figurehead or an ambassador for the company, being able to represent the company in the outside world. The director
represents the company in the external arena: for example, in meetings with fund managers and financial analysts, or in trade
and industry gatherings.
5. Connecting the board to networks of useful people not otherwise available to the board. For example, the director might be
well placed to forge contacts in the world of politics and government, to link the company with relevant banking, finance, or
stock exchange connections, or to make introductions within industry or international trade.
6. Providing status to the board and the company, adding capability, reputation, and position.
However, the status role can be useful at times; for example when a particular listed company faced a financial crisis, the market
was reassured when a well-known financier joined the board. Exposure to litigation may now deter some public figures from
accepting directorships. However, even today, if a company has been experiencing problems, confidence may be restored if a high-
profile, well-respected figure joins the board.
conformance-orientated roles
A. Providing independent judgement, the ability to see issues in their totality and from various perspectives, leading to
objective judgement—in other words, ‘helicopter vision’. As the Cadbury Report suggested, ‘non-executive directors should
bring an independent judgement to bear on issues of strategy, performance, resources, including key appointments and
standards of conduct’.
B. Being a catalyst for change, questioning existing assumptions, introducing new ideas and approaches, and stimulating
developments. This role can be played by a director who questions the board’s assumptions, and makes others rethink
situations. Most valuably, catalysts stimulate the board discussions with new, alternative insights and ideas.
C. Being a monitor of executive activities, offering objective criticism and comments on management performance and issues
such as the hiring and firing of top management. The entire board is responsible for the monitoring and supervision of executive
management, but INEDs can bring a particular focus to this role.
D. Playing the role of watchdog, able to provide an independent voice and protect the interests of minority shareholders or
lending bankers. Directors cast in this role are seen as protectors of the interests of other parties, such as the shareholders or,
more often, a specific interest group. Nominee directors inevitably find themselves in this position, as they look out for the
interests of the party who nominated them to the board.
E. Being a confidant(e) or sounding board for the chair, CEO, or other directors, acting as a trusted advisor during times of
uncertainty and stress, and providing a space to discuss issues, often interpersonal ones, outside the boardroom. The confidant
can play a crucial role in navigating the political dynamics at the board level, but it is essential that they earn the trust of all
directors to avoid problems.
F. Acting as a safety valve, able to act in a crisis in order to release the pressure, prevent further damage, and save the situation.

Directors’ duties, rights, and powers

Duties
Directors around the world have two fundamental duties: a duty of trust and a duty of care—
1. a duty of trust to exercise a fiduciary responsibility to the shareholders,
a) Act honestly - for the benefit of members, Exercise powers in good faith, for the benefit of the members in the short
and long term, maintain a reputation for good business conduct.
b) Show independence of judgement
c) Avoid conflict of interest - not make a secret profit, not use any property, information, or opportunity from the
company for his own benefit
d) Act fairly
2. a duty of care to exercise reasonable care, diligence, and skill. Beyond those two broad duties, directors’ responsibilities are
often enshrined in laws designed to protect consumers, employees, the environment, and so on….
The US Sarbanes-Oxley Act of 2002 added some directors’ duties to statute, including:
the need to confirm the effectiveness of the company’s reporting and management control systems, and the handling of
strategic risk.
The United Kingdom is an exception to the general rule that directors’ duties are not specifically defined by statute law.
The UK Companies Act 2006 attempted to consolidate the common law duties of directors in a definitive statement. In the United
Kingdom, directors must act in the way they consider, in good faith, would be most likely to promote the success of the company for
the benefit of its shareholder members as a whole and in doing so have regard to:
the likely consequences of any decision in the long term;
the interests of the company’s employees;
the need to foster the company’s business relationships with suppliers, customers, and others;
the impact of the company’s operations on the community and the environment;
the desirability of the company to maintain a reputation for high standards of business conduct;
the need to act fairly, as between members of the company.
In civil law countries such as Germany, the managing director is given the responsibility for managing the company and acts as its
legal representative. He or she must employ the diligence of an orderly businessman, specifically to:
pursue the business purpose;
manage the company properly;
be loyal to the company;
not disclose confidential information or company secrets;
not take advantage of his or her position.

Rights
All directors have the right to information about the company, its business, and its financial and operating situation.
This right to information goes beyond routine board papers and reports, to receiving answers to any question a director wants
to ask about the company’s affairs.
All directors have a right to attend and take part in board meetings and meetings of the shareholders.

Powers
Appointment of Directors: Shareholders have the legal right to appoint and remove directors. This is typically exercised through
voting at the annual general meeting (AGM).
Voting on Major Decisions: Shareholders vote on significant corporate actions such as mergers, acquisitions, changes to the
company’s articles of association, and other major transactions.
Approval of Financial Statements: Shareholders review and approve the company’s annual financial statements, providing
oversight of the company’s financial health.
Calling Special Meetings: Shareholders holding a certain percentage of shares can call special meetings to address urgent issues
or propose changes in the company’s management or policies.
Corporate Governance Influence: Shareholders, particularly institutional investors, can push for changes in corporate
governance practices, such as board composition, executive compensation, and sustainability practices.
Shareholder Activism: Shareholders can engage in activism, using their equity stake to influence the company’s behavior and
decision-making. This can involve public campaigns, litigation, or negotiations with management.
Inspection Rights: Shareholders have the right to inspect company records and documents, providing a mechanism for oversight
and accountability.

Conflicts of interest
A corporate conflict of interest occurs if a company (and therefore its shareholders) takes advantage of its unique position of trust.
A personal conflict of interest arises if a director could benefit personally from a situation involving the company or from a decision
taken by the board. For example, a conflict of interest would arise if a director:
1. owned a business that supplied the company or was a major customer, sometimes called ‘connected transactions’;
2. served on the board of another company that had business dealings with the company;
3. had a significant personal shareholding in another company that the board was considering as an acquisition target;
4. interviewed a relative or close friend in a recruitment exercise;
5. had the personal use of property belonging to the company; used company information for his or her personal benefit.
In some jurisdictions reporting conflicts of interest to the company is required by company law. Many companies have policies on
the handling of conflicts of interest and include rules on their identification and disclosure in their code of conduct.
A director with a conflict of interest should inform the board chair before the meeting, usually through the company secretary.
The director should not take part in any decisions on the matter until the chair and other directors decide what to do.
The director may be asked to leave the meeting during the discussion or to stay but not participate and abstain from voting.
If the chair and other directors think the conflict is not significant, they may allow the director to participate. If the chair has a
conflict of interest, someone else should lead the discussion for that agenda item.
A conflict of interest sometimes called a conflict of roles can arise if an executive director holds more than one position in the
company: for example, as chief executive and chair of the board. Most corporate governance codes, of course, consequently call for
these two posts to be held by different people.
In fact, a similar challenge faces all executive directors during board deliberations, if the responsibilities and interests of the
executive post conflict with what appears to be best for the company as a whole.
Role conflict can then arise, particularly if the individual concerned is a dominant personality.

Using insider information

In the UK, it might also be prudent to notify the event to the Financial Conduct Authority, and in the USA to the SEC.
Not trading in their company’s shares when in possession of inside, privileged information, such as the company results just prior to
publication and before the stock market has that information, is particularly important. The company secretary will often inform
directors when the window of opportunity for trading in the company’s shares is open and, more importantly, when it is closed.
Insider dealing, sometimes called insider trading, involves the buying or selling of shares in a listed company on the basis of
privileged, share-price-sensitive, insider information.
Insider dealing may involve making a secret profit by buying shares in the privileged knowledge of events that would drive the
price up, or avoiding a loss by selling shares on the basis of privileged intelligence that would cause the price to fall.
Insider dealing laws apply to directors, but also to officers and senior executives.
Insider dealing destroys the credibility and the integrity of the stock market.
Insider dealing is a breach of a director’s fiduciary duty: it is illegal in almost all countries
The term related-party transaction refers to a deal or arrangement made between two parties who are joined by a preexisting
business relationship or common interest. Companies often seek business deals with parties with whom they are familiar or have a
common interest.
 related party-transactions carry the innate potential for conflicts of interest, so regulatory agencies scrutinize them carefully.
 This must be disclosed and, in some cases, to be approved by the shareholders .
Related-party transactions are frequently found in family firms where there are close links between family members and companies
connected with the family.

Directors’ service contracts and agreements

An executive director is both an employee and a director of the company.
An executive director’s employment agreement is a contract between the director and the company, which regulates the
employment relationship, and will include terms required by employment law, such as remuneration, holidays, and pension
arrangements.
However, all directors, executive and non-executive alike, may have a service contract as a director, which lays down the terms of
the directorship. In the United Kingdom, a long-term service contract is defined as a contract for a guaranteed term of more than
two years which cannot be terminated by notice within that period. A company can terminate a director’s contract having given
reasonable notice, without requiring shareholder approval, although it may face costs, depending on the terms of the contract. UK
law also gives shareholders a right to inspect such service contracts and to request copies.

Directors’ remuneration
The remuneration committee
The remuneration committee needs to establish a formal and transparent procedure for developing policy on executive
director remuneration. The challenge is to provide sufficient incentive to attract and retain top management in a competitive
market for talent, rewarding success, while avoiding excesses and apparently rewarding failure.
Independent directors form the committee to ensure directors do not set their own pay . However, a committee of independent
directors may still lack full independence. Members might feel loyal to top executives who nominated them and may also be
executive directors at other companies, potentially leading them to recommend high rewards to boost their own market rates.

Determining directors’ remuneration

They need to be sufficient to attract the necessary top executives, to provide an incentive for better than average performance, to
reward success, and to retain the vital executives’ commitment to the company.
Various arguments are sometimes advanced to justify high board-level rewards, including the following:

1. international comparison is essential: it is essential that we give our directors rewards that are broadly comparable to those
they could obtain in our industry anywhere in the world’—
2. the headhunter argument: when a new executive director is recruited, the headhunters recommend a package that is
substantially higher (in this case, 30%) than that of the highest-paid director already in the company.
3. the better than average argument: ‘we cannot pay our directors below the median for firms our size in this industry’—
4. the ‘top of the industry’ claim: ‘our firm prides itself on being one of the leaders in the industry, even though at the moment we
are not among the most profitable;
5. the transparency effect: ‘greater transparency in directors’ pay leads to higher remuneration as companies play “catch-up”’;
6. the fear of loss of people: ‘the best people receive offers from elsewhere; we could lose our directors and top management to
the competition unless we pay competitive rates’;
7. doubling up the bonus: ‘we believe that it is important for directors’ rewards to be performance-related; moreover, we expect
excellent performance in both the short and the long term; so we calculate bonuses on the annual profits—this way, directors
get rewarded twice for the same performance, inflation is ignored; moreover, directors do not get penalized for poor
performance.

Share options
The ideal structure for executive directors' remuneration should tie rewards to both corporate and individual performance over
time, aligning managers' interests with those of shareholders. However, these schemes can sometimes incentivize deceptive
behavior if directors manipulate share prices, revenues, or profits to meet incentive targets.
Share options have long been used to reward and motivate top executives. Options grant the right to buy shares at a predetermined
price in the future, incentivizing directors to increase share prices through improved corporate performance.
Some schemes use market indexation to reward performance better than the market, but this can also benefit executives during
market declines. Unscrupulous directors may attempt short-term maneuvers to boost share prices, creating an agency dilemma.
In the past, companies did not account for the cost of share options properly, but accounting standards now require options to be
valued and shown as a charge. As a result, the use of share options is declining, with attention shifting to other incentive schemes.
However, if not carefully managed, these schemes can also lead to suboptimal outcomes as directors manipulate incentive criteria.

Reporting and voting on director remuneration

Legislation enacted in the United Kingdom in 2003 required quoted companies to publish a directors’ remuneration report and put
this to shareholder vote at the annual general meeting (AGM). The report has to contain details of:

1. the members of the remuneration committee and anyone who advised that committee,
2. a statement of the company’s policy on directors’ remuneration,
3. details of individual directors’ remuneration,
4. giving details of the performance criteria in incentive schemes, pensions and retirement benefits, their service contracts,
5. and a line graph for the past five years showing how the company’s performance has compared with that of competitors
In the United States, Securities and Exchange Commission rules since 2007 have required full disclosure of pay packages of top
management.
In the United Kingdom, shareholders have had the opportunity to vote on directors’ pay since 2002. An interesting initiative by the
UK Institute of Management Accountants, PriceWaterhouseCoopers, and Radley Yaldar has produced a model remuneration report,
which shows the principles of a company’s remuneration policy, the link between performance and reward, and the alignment with
shareholder interests
The Commission of the European Union introduced a cap on bankers' bonuses in 2014, limiting them to 100% of annual salaries or
200% with shareholder approval. Many banks, including Barclays and Lloyds, found ways to sidestep these rules, such as paying chief
executives in shares or increasing base salaries. In the US, the SEC implemented a provision of the Dodd-Frank Act in 2013, requiring
public companies to disclose the ratio of CEO pay to the median total annual compensation of employees.
In 2018, the UK's FRC updated its Corporate Governance Code, emphasizing that remuneration committees should consider
workforce remuneration when setting director pay. Some criticized the complexity of executive pay packages, prompting the FRC to
reject overly formulaic calculations and encourage discretion in setting pay.
However, some commentators felt these measures lacked teeth, and the FRC faced challenges given the directors' power over
executive decisions, including their own pay. While shareholder reactions to remuneration reports may indicate dissatisfaction,
shareholder power in determining director pay is limited, leaving director remuneration a contentious issue in corporate
governance.
The US Sarbanes-Oxley Act 2002 (SOX)
To strengthen corporate governance and restore investor confidence following Enron, WorldCom, and others
SOX imposed new accountability standards, with criminal penalties, on directors.
CEOs and CFOs must certify under oath that their financial statements neither contain an ‘untrue statement’ nor omit any
‘material fact’
Audit committees must be comprised totally of independent outside directors.
SOX also established new independence standards for external auditors
Areas of lucrative non-audit work by audit firms prohibited
A Public Company Accounting Oversight Board (PCAOB) created to oversee public accounting (auditing) firms and to issue
accounting standards
Rules regulated by the SEC and apply to all companies quoted in the United States, including overseas companies listed there
Sarbanes-Oxley Act differentiated the United States from many other countries by enshrining corporate governance practice in
law rather than voluntary codes
S. 404 SOX
Management must:
Accept responsibility for the effectiveness of the company’s internal control over financial reporting
Evaluate the effectiveness of the company’s internal control
Support its evaluation with sufficient evidence
Present a written assessment
If the auditor concludes that management has not fulfilled these responsibilities, the auditor should report to management and
the audit committee and disclaim an opinion.
UK Companies Act 2006
Clarified directors’ duties for the first time in statute law
Made clear that directors have to act in the interests of shareholders
But added that in acting in the shareholders’ interests, they must pay regard to the longer-term interests of employees,
suppliers, consumers, and the environment.
Encouraged narrative reporting by companies calling for them to be forward-looking, identifying risks as well as opportunities
Quoted companies have to provide information on environmental matters, employees, and social and community issues
This business review must include information on any policies relating to these matters and their effectiveness, plus contractual
and other relationships essential to the business
Promotes shareholder involvement in governance by enhancing the powers of proxies
Makes it easier for outside investors to be informed and exercise governance rights in the company
Allows shareholders to limit the auditors’ liability to the company to what is fair and reasonable
Requires institutional investors to disclose how they used their votes
 Introduces a new offence for recklessly or knowingly including misleading, false, or deceptive matters in an audit report.

Chapter 15: Board Activities: Corporate Governance in Practice

Committees of the board
An important development in corporate governance was the formalization of board subcommittees. A principal requirement now
under almost all corporate governance codes is for at least three board committees—
1. The remuneration (compensation) committee- is responsible for recommending to the board the remuneration packages
of executive directors, and sometimes other top management, including their salary, fees, pension arrangements…
2. The nomination committee- responsible for proposing names for nomination as additional or replacement directors,
personalities, and diversity to the board, and to avoid domination of the nomination process by the chair, chief executive
officer (CEO), or any other dominant directors
3. The audit committee-
These standing subcommittees of the main board are established for specific purposes, usually with a charter or formal terms of
reference.
These board subcommittees are directors who are not part of executive management, nor connected non-executive directors but
directors with no links to the company other than their directorship.
Some boards also create other standing board committees to handle specific areas of board responsibility, such as risk governance
(or management) committees, corporate governance and compliance committees, and corporate social responsibility and ethics
committees. Other boards have an executive committee or general purposes committee to cover aspects of the board’s role in
supervising executive activities,
Such arrangements can contribute to board effectiveness, provided that the deliberations and decisions of any subcommittee are
carefully minuted and reported to the main board, with opportunity for the other directors to be informed, to question, and, if
necessary, for the board to amend the subcommittee’s decisions.
The challenge to board subcommittees can be keeping the other directors informed and involved in their activities and decisions.
Boards also form ad hoc committees to be responsible for handling specific, one-off issues: it is important that the objectives of the
committee, the scope of its powers are carefully described in the board’s policy document that creates it and terminated when its
mission has been completed.
To be effective, board subcommittees require clear terms of reference, which need to cover:
1. Details of membership—committee size and qualifications for membership, the nomination process…
2. Chair’s appointment and responsibilities;
3. Committee purpose and duties—
4. Relations between the committee and top executives;
5. Frequency of meetings;
6. Secretary to the committee, notice for meetings, agenda, minutes;
7. Staff support, access to legal and other professional advice;
8. Accountability, transparency, reporting requirements, circulation of committee minutes to all directors;
9. Regular review of the committee’s performance and purpose;

The influence of the audit committee

Every director should be aware of significant matters that have arisen during the audit by the independent, external auditor
The audit committee, a standing committee of the main board, composed entirely or predominantly of independent, outside
directors, provides a bridge between the external auditor and the board.
 The audit committee meets 4-5 times a year, more if needed, to discuss the details of the audit.
 The audit committee will often negotiate the audit fee and, if appropriate, recommend to the board if a change of auditor is
needed.
Corporate governance codes require listed companies to have audit committees. The members must all be INEDs, at least one of
whom should have current financial expertise. The role and responsibilities of the audit committee include:
1. advising the board on the company’s systems of internal management control;
2. oversight of internal audit;
3. liaising with the external auditors and reporting to the board on the audit process and on any audit issues;
4. reviewing financial information to be provided to shareholders, the stock market, and the media;
5. Accountability for board;
6. Oversight of ERM; and corporate governance compliance.
The specific duties of an audit committee might include:
1. liaising between the board and the independent external auditors, including: Advising the board on the appointment. re-
appointment, resignation, or replacement of the external auditor
2. liaising between the external auditor, the internal auditor, and the board as a whole;
3. ensuring the independence of the external auditors, reviewing the extent of non-audit work undertaken by the external
auditors, and the fees involved
4. Reviewing the audit fees and advising the board accordingly
5. Considering the scope of and the plans for the audit by the external auditors.
6. Agreeing the scope of the work and plans of the internal audit
7. Ensure that the activities of the external and internal auditors are coordinated, avoiding both duplication or incomplete
coverage
8. Reviewing the appointment, performance, remuneration, and replacement or dismissal of the head of the internal audit
function, ensuring continuing independence of the internal audit function from undue managerial influence.
9. Reviewing with the external and internal auditors and advising the board on the adequacy of the company’s internal control
systems, security of physical assets, and protection of information
10. Reviewing with the external and internal auditors and advising the board on the company’s financial statements prior to
publication, the auditor’s report to the shareholders, any changes to accounting policies, material issues arising in or from the
financial statements; and compliance with accounting standards, company law reporting requirements and corporate
governance codes of good practice.
11. Reviewing the exposure of the company to risk and any matters that might have a material affect the company’s financial
position, including any matters raised by company regulators or stock exchange listing committees. (Sometimes the
responsibility of a separate board strategic risk committee)
12. Reviewing annually the charter of the audit committee itself and advising the chairman of the board if changes are necessary.

The role of the audit committee

Audit committees manage their own agenda and produce minutes of the meetings they hold. But they do need to work closely with
senior officers, particularly the CFO, and with the finance function, internal audit, the independent auditors, particularly the audit
firm’s partner leading the audit.
The head of the internal audit function often reports directly to the chair of the audit committee, thus providing a degree of
independence from the finance function.
The chair of the audit committee is typically appointed by the board. Frequently, the CFO or members of the finance function, the
internal auditor, and a representative of the external auditors are invited to attend meetings of the audit committee. Other
executive directors or members of management may be asked to attend if necessary.
At least once a year, the audit committee should meet formally with the external auditor without any members of
management being present.
The external auditors should also meet with the entire board at least once a year and be available to answer questions at
meetings of the shareholders.
A board will rely on its audit committee to ensure that a balanced and understandable assessment of the company’s position and
prospects is presented to shareholders and other legitimate stakeholders, such as the taxation authorities.
The board may also expect the audit committee to ensure:
 that the systems of internal control in the organization are sound, to safeguard shareholders’ investment and the company’s
assets. Further,
the audit committee may be expected to have formal and transparent arrangements applying financial reporting and internal
control principles, and for maintaining an appropriate relationship with the company’s auditors.
The audit committee should set itself clear and measurable objectives If they fail to meet their objectives the reasons should be
diagnosed and remedied, reporting accordingly to the board. Some corporate governance codes now call for a regular
evaluation of the performance of the audit committee.
In the United States, the SOX Act (2002) introduced new and strict requirements on independent external auditors and increased
audit committees’ responsibilities and authority. In the United Kingdom, the Smith Report (2003) focused on the audit committee
with requirements that have subsequently been enhanced by the UK Corporate Governance Code.
Criticisms of audit committees include the concern that:
 members can get too involved in executive management matters and interfere in management’s legitimate responsibilities.
 audit committee can become bureaucratic and process-driven .
But the European-style two-tier supervisory board ensuring compliance, which proponents of the unitary board distrust.

The role of internal audit

The role of internal audit –
to provide independent assurance that risk management, governance, and internal control processes are operating effectively.
Unlike external auditors, they look beyond financial risks and statements to consider wider issues such as the organization’s
reputation, growth, its impact on the environment, and the way it treats its employees
They provide an independent, objective, and constructive view.
Boards and their audit committees expect internal audit to provide:
1. an ongoing analysis of business processes and associated controls
2. reviews of operational and financial performance , compliance framework , organization’s values and code of conduct or ethics
3. an evaluation of the effectiveness of these control systems
4. assessments of the achievement corporate mission, policies, and objectives
5. identification of areas for more efficient use of resources
6. confirmation of the existence and value of the company’s assets
7. ad hoc inquiries into possible irregularities and frauds
8. identification of compliance issues and confirmation of compliance
And if no board strategic risk committee:
 an evaluation of the risk assessment and review systems
 regular evaluation of risk at all levels in the organization
 ad hoc reviews of unacceptable levels of risk
The UK Smith Report (2003) and subsequent Corporate Governance Codes assign management the responsibility for risk
management and internal controls, but also note that the board is responsible for reviewing these systems' effectiveness.
In Australia, the ASX Principles of Good Corporate Governance recommend that internal audit should report to management but
also suggest a secondary reporting line to the board or relevant committee. They emphasize that the audit committee should have
access to internal audit independently of management and recommend that the audit committee advise the board on the
appointment and dismissal of the chief internal audit executive.
According to a study by KPMG, the optimal solution for internal audit reporting is to have it report primarily and directly to the
board and its audit committee rather than to senior management. The benefits of this arrangement include:
 Avoiding limitations on the scope of audits that could arise from departmental biases, such as the finance department.
 Ensuring that the board and audit committee receive unfiltered and accurate information on internal controls and risk
management.
 Maintaining the absolute independence of the internal audit function.
 Securing the funding for internal audit outside the usual budgeting process, allowing resource allocation based on the
organization's assurance needs as determined by the board or audit committee.
 Allowing the board/audit committee to directly evaluate the internal audit function's contribution to internal control
responsibilities.
 Enhancing the board/audit committee’s understanding of the business and its risk profile, aiding in their interactions with
management and stakeholders.
The report highlights several downsides of the internal audit function reporting directly to the audit committee.
1. internal audit might be excluded from some company information if seen as outside the management structure.
2. The audit committee chair may lack the time or resources to oversee internal audit effectively.
3. The audit committee could face increased responsibility and potential liability for the organization's internal controls and risk
systems. Additionally, it could limit the CEO's ability to use internal audit for reinforcing control principles or special projects.
The Institute of Internal Auditors suggests that whoever the internal audit function is responsible to there are some key measures to
ensure that the reporting lines enable effectiveness and independence. These key measures are as follows:
1. Private Meetings with the Board/Audit Committee
2. The board or audit committee should have final authority to review and approve the annual audit plan and any major changes.
3. Compensation level and reward
4. Sufficient Authority for Support
5. Open and Direct Communications:
6. Adequate Information Flows:
7. Budgetary Controls and resources

The importance of the external auditor

In the United States, the Public Company Accounting Oversight Board- PCAOB standards require auditors to:
obtain reasonable assurance that effective internal control over financial reporting has been maintained
assess the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk
perform such other procedures as are considered necessary in the circumstances.

The appointment, remuneration, and removal of auditors

In most jurisdictions, the auditor of listed companies is formally appointed, reappointed, or replaced by the shareholders in
general meeting on the advice of the board, typically working through their audit committee.
In private companies, the auditor is typically chosen by the board.
Auditors’ remuneration and their removal, should it become necessary, are also generally agreed by the board on the advice of
the audit committee.
But who does the auditor work for and report to: the management, the directors, or the shareholders?
Historically, in the USA the external auditor reported to management. BUT This is now enshrined in PCAOB and securities
regulation in the USA and Canadian Instrument 52–110.
In other jurisdictions, including the United Kingdom, the external auditors work for and report to the shareholders, although de
facto they work with management and report to the directors through the independent directors on the audit committee.

The independence of external auditors

The standing of independent external auditors hinges on the definition and confirmation of independence
US PCAOB requires registered public accounting firm to describe to the audit committee of listed clients all relationships between
the auditor and the audit client or persons in financial reporting oversight roles at the audit client that may reasonably be thought to
bear on independence.
At least annually with respect to each of its listed company audit clients: (to the audit committee of the issue listed company)
1. potential effects of the relationships;
2. document
Independent assessment of audit practitioners
Historically, the accounting profession relied on self-regulation through peer assessment to maintain standards. However, there has
been a shift towards independent assessment of audit quality. In 2008, the European Commission recommended that member
states establish independent and effective systems for inspecting firms auditing public companies, enhancing public oversight,
inspection team independence, and transparency of inspection results.
In 2014, the European Parliament introduced further reforms to prevent auditors and companies from becoming too close. These
reforms included restricting non-audit services provided by audit firms and requiring companies to tender their audit every ten years
and change auditors every twenty years.

The significance of the company secretary

Many company law jurisdictions require the appointment of a company secretary (CoSec) with statutory duties
In the United States the role of company secretary is known as the corporate secretary and is often taken by the company’s
legal officer
The company secretary is an officer of the company and has a duty to act in good faith in the best interest of the company.
In the UK only public companies must have a CoSec. Private companies have the option to have a company secretary if the
shareholders wish
In some jurisdictions, the company secretary can be a ‘legal person’, that is a limited company: in others the CoSec must be a
real person.
The American Society of Corporate Secretaries suggests that they organize meetings of board, board committees, and shareholders;
maintain corporate records and stock records; and liaise with the securities markets. The corporate secretary should be ‘the primary
liaison between the corporation’s directors and management’.
The duties of the company secretary may include:
1. Advising the chairman on legal rules and regulations affecting the enterprise
2. Convening board, board committee, and company (shareholder) meetings
3. Advising on and guiding board and board committee procedures
4. Advising the chairman on agenda and writing the minutes for the chairman's approval
5. Maintaining the company’s statutory records such as the register of members (shareholders), register of directors and their
interests, directors’ service agreements,
6. Filing company law returns with the companies’ registrar or regulatory authority
7. Ensuring compliance with companies legislation, the corporate governance codes, and where appropriate the stock exchange
listing requirements
8. Ensuring compliance with other relevant regulations and laws
9. Administering changes to the company constitution (memorandum or articles of association).
UK Cadbury Report (1992)
The company secretary has a key role to play in ensuring that the board procedures are both followed and regularly reviewed
The chairman and the board should look to the company secretary for guidance on what their responsibilities are . . . and on
how these responsibilities should be discharged
All directors should have access to the advice and services of the company secretary
The chairman is entitled to strong support from the company secretary in ensuring the effective functioning of the board.’
The company secretary should be responsible for advising the board through the chairman on all governance matters
Under the direction of the chairman, the company secretary’s responsibilities include
1. ensuring good information flows
within the board and its committees
between senior management and non-executive directors
2. facilitating induction and assisting with professional development of directors.
3. UK Corporate Governance Code
Chapter 17: Board Evaluation: Reviewing directors and boards

Questions
Chapter 8
Questions: Ch 8: The governance of corporate risk

1. Name 3 regulatory instruments that call for risk management responsibility at board level.

Turnbull Report UK governance codes 1999- attention to the importance of board-level risk assessment- includes principles on
boards’ responsibility for risk management, calling for an integrated approach to ERM.
Sarbanes-Oxley Act US 2002- SOX mandates that corporate boards, particularly audit committees, are responsible for ensuring
effective risk management practices within the organization. This includes oversight of financial reporting and internal controls to
mitigate risks of fraud and financial misstatements.
Basel ll agreement for the financial world 2003. (Basel Committee on Banking Supervision,)- ‘the bank’s board of directors has a
responsibility for setting the board’s tolerance for risks’. Basel III sets standards for bank capital adequacy, stress testing, and
liquidity risk management. It emphasizes the importance of board oversight in assessing and managing risks within financial
institutions.
2. Some boards include corporate risk assessment in the mandate of the board audit committee. Why might this have
limitations?

Audit committees tend to be orientated towards the past, involved with audit outcomes, and approving accountability information
for publication, while risk assessment needs a proactive, forward-looking orientation.

3. What alternatives do other companies adopt to bring risk issues to the board?

From a risk assessment or risk management committee has a distinct standing committee of the board.

Some boards create dedicated risk assessment or risk management committees, includes mainly independent non-executive
directors (INEDs) with relevant business experience. Initially, these committees may meet frequently during the building of risk
management systems but then reduce frequency to two or three times a year, reporting to the full board

4. Who might be involved in a risk management subcommittee, and how does it operate?

Such a risk management committee might have four or five members, wholly or mainly INEDs with appropriate business experience,
meeting, perhaps, four times a year, and reporting to the board as a whole. Members of senior management and external expert in
risk might be invited to attend meetings to give advice.

5. Where else might responsibility for risk assessment and management be placed in a company?

In management based risk management committee, which might include the CEO, the CFO, profit responsible division or unit heads,
and the CRO, with external experts invited to attend to give advice.

 Standing committee of main board or sub-committee of audit committee

 Chairman, CEO, CFO, INEDS plus attendance of CRO, profit unit heads, external experts
 Responsible for risk management policies, procedures, and plans
 Produces risk management plan for main board approval
 Meets 3 or 4 times a year or when facing exceptional risks
  Linked with internal and external audit.
6. Identify the levels of risk in a business.

In every organisation, risk arise at various levels:

1. corporate strategic risk-exposure to threats from outside the organisation;  competitor activities  consumer activities 
stock and finance market hazards  government and regulator activities  terrorism or political debated actions –
2. managerial-level risks-exposure to risk arising from the firm’s activity;  board level strategic failings  lack of board level
security  shortage of skilled experienced staff
3. operational risk-exposure to hazards within the enterprise  fire, explosion, flood  loss of power (example inability to carry
out trades)  Poor cyber security
7. What should an enterprise risk management system (ERMS) provide and to whom?

Enterprise risk management systems (ERMS) provide information routinely and regularly for management to take executive
decisions, and for the board to carry out its monitoring and supervisory function.
The ERMS should also generate information to enable the company to communicate externally to auditors, regulators, shareholders,
and other legitimate stakeholders, as well as to its insurers and brokers.
However, because such systems hold masses of vital information, data protection, confidentiality, and cyber-security are vital.
8. Name the iterative phases involved in the analysis of risk in an organization.

 Risk recognition
 risk assessment
 risk evaluation
 risk management policies
 risk monitoring
 risk transfer (buying insurance, creating a derivative,
or just self-insuring)

9. Identify some risk assessment and risk management tools that are available.
1. A simple tabular approach, identifying risk analysis centres and listing risks and effects

The documentation for the risk analysis programme should contain guidance to staff on the range of risks to be covered,
including likely effects or outcomes of each occurrence.
Vital to record risk factors
 2. A matrix with estimated costs and numerical probability estimates

A potential drawback of this approach is that a managerial focus might fail to identify strategic risks.
3.
A questionnaire designed to identify risks and hazards. This format can also be used to document compliance and non-
compliance with risk management policies
4. Software programs developed to provide online identification and reporting of risks
5. Proprietary programs and systems, available form software houses and consulting firms.
6. Mind mapping- This involves a visual approach to recognizing risk factors, plotting their interrelationships, and then
deriving the possible implications.
7. risk benchmarking by industry, country, or other company
10. What policy options does a board have when deciding its approach to enterprise risk management?
1. Avoid the risk. Do not commit to the planned action. Abandon the proposed project.
2. Mitigate the risk by making capital investments or incurring ongoing expenditure- preventive controls
3. Transfer the risk. insurance, hedging, outsourcing

Create derivative instruments—that is, agreements with financial institutions that transfer risk to third parties. Negotiate forward
contracts for the supply of goods and services.
4. Retain the risk. In other words, accept it. This risk strategy—what some commentators call the firm’s ‘risk appetite’—
needs to be made at board level.

Chapter 9
Name six types of stakeholder that a company might have
The stakeholders of a company could include: -
1. customers of the end product or service;
2. agents, distributors and others in the downstream Supply chain;
3. original suppliers and others in the upstream Supply chain;
4. other creditors;
5. bankers and non-equity sources of finance;
6. employees, including managers;
7. self-employed contractors to the company;
8. local and national societal institutions;
9. regulators; - government, local and national;
10. Society generally

1.What are business ethics?

Business ethics is the study of business situations, activities and decisions where issues of right or wrong size addressed.
2. What are the different perspectives on CSR are discussed in the chapter?
Societal; strategy driven; stakeholder; ethical; political;
philanthropic
Societal; strategy driven; stakeholder; ethical; political; philanthropic.
1. Societal perspective_ this view holds that companies have responsibilities beyond just obeying law and paying their taxes,
because their activities have an overall impact on society. A commitment to CSR recognizes that companies should be
accountable not only for their financial performance, but also for their impact on society.
2. The strategy -driven perspective_ This perspective starts from the proposition that business social responsibility is an integral
part of the wealth-creation process. A company runs in a socially responsible way because its CSR strategies and policies are
business-driven, in both the short and long terms. Such companies make a solid business case for their CSR policies based on
cost-effective criteria. All corporate strategies—research, exploration, product development, production, marketing, human
resources, and financial—are contingent on the CSR objectives. CSR that is strategy-driven and rooted in a solid business case
also produces a more sustainable result long-term. The business case for taking a stakeholder approach to corporate
governance is that it enhances competitiveness, increases customer satisfaction, improves employee relations, reduces the cost
of capital, and enhances shareholder value.
3. The stakeholder perspective_ Companies with this perception see CSR as the alignment of corporate values and actions with
the expectations and needs of their stakeholders—shareholders, customers, employees, suppliers, communities, regulators,
other interest groups, and society as a whole. Their CSR policies describe the company’s commitment and responsibility to its
stakeholders. Adopting this perspective, the European Commission has defined CSR as ‘a concept whereby companies integrate
social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary
basis’.
4. The ethical perspective_ The ethical viewpoint sees that corporate entities, like individuals, have an obligation to act for the
benefit of society as a whole, contributing to society while doing no harm to others. A wide range of laws and guidelines that
steer and control corporate behavior already exist at state, national, and global levels on health and safety, human rights,
environmental issues, and sustainability. The board needs to be the conscience of the company—responsible for establishing its
corporate values. Ethical codes, understood throughout the organization, reflect the directors’ own behavior. An ethical
standpoint is likely to produce voluntary CSR policies that go well beyond the requirements of laws and guidelines.
5. The political perspective_ Interest groups, some with an anti-business agenda, argue that CSR is no more than vested self-
interest at best and a public relations window-dressing exercise at worst. Some have called for legislation to impose standards
of CSR on companies, particularly multinationals. The response from the Confederation of British Industry (CBI) was that CSR
should remain market-driven and voluntary. Attempts to raise standards, the CBI believes, would remove the competitive
incentive that drives CSR activity and would place an unmanageable burden on companies, particularly small and medium-sized
firms. CSR policies should reflect companies’ activities and the context in which they operate, while legislation in this area would
constrain business activity and reduce CSR to a lowest common denominator, the CBI said.
6. The philanthropic perspective_ For many years, some companies have sought to ‘put something back’ into the society that
provided them with customers, employees, and success. Such corporate philanthropy may involve charitable giving to support
communities, charities, or other causes, in money or corporate services, such as employees’ time. Donating to charitable causes
without anticipating any reward, save perhaps a reputational benefit, has long been practiced in the United States, some
European countries. But CSR practices vary between countries and cultures. Different value systems, different economic
conditions, and different social priorities mean that no ‘one size’ can ‘fit all’.

3. What might a firm’s socially responsible activities include?

The firm’s socially responsible activities might include:
1)The contributions of facilities, staff time to local and other organizations;
2)Educational and academic contributions_
 support for local and other academic institutions; -
 contributions to research and similar activities;

3)aesthetic and arts contributions_

 expenditure on building and landscape design; -
 sponsorship of arts, crafts, and similar activities;

4)sports and leisure contributions.

4. What is enlightened shareholder value?
Boards adopting an enlightened shareholder value (ESV) approach believe that the satisfaction of the needs of stakeholders is
crucial to corporate success and essential to creating value for shareholders. The ESV concept of corporate governance attempts to
overcome apparent conflicts between the shareholder and the stakeholder focused perspectives.
Profits can be generated, shareholder value created, and society’s wealth increased by satisfying stakeholder interest, rather than
through the classical attempts of shareholder theory to maximize shareholder wealth.
5. Who should lead a company’s CSR efforts?
To be effective a company’s CSR efforts need to be led by the directors and involved in its corporate strategy. A primary duty of the
board is to identify the aims of the company, establish its mission, and set its values. A company’s attitude to CSR should be
embedded in its corporate strategy
6. What is a CSR policy?
CSR policy determines how the company engages with its shareholders and the other stakeholders, including its employees,
customers, and suppliers, the communities in which it operates, and the world generally. To be effective, CSR policies need to be
understood, accepted, and applied throughout the organization. They also need to be reviewed regularly to reflect changing
business, economic, and social situations.
7. When might a clear CSR policy influence potential investors?
A clear CSR policy can influence potential investors looking for socially responsible, ethical, and environmentally friendly enterprises
in which to invest.
8. How does the Brundtland Report define sustainable development?
The United Nations Commission in the Brundtland report defined sustainable development as development that meets the needs of
the present without compromising the ability of future generations to meet their own needs.
9. What is the Global Reporting Initiative and who is involved?
The Global Reporting Initiative (GRI), which was caused by the UN Global Compact, is a worldwide, multistakeholder network
aiming to create and develop a sustainability reporting framework, in which business, civil society, labor, investors, accountants, and
others collaborate.
10. What is the basic belief behind the Global Reporting Initiative?
The Global reporting initiative (GRI) is based on the underlying belief that reporting on economic, environmental, and social
performance by all organizations should be as routine and comparable as financial reporting. The Global Reporting initiative (GRI)
facilitates transparency and accountability by organizations of all sizes and sectors across the world—companies, governmental and
other public agencies, and non-profit entities.
11. how many types have standard disclosure and define?
Three types of standard disclosure are included:
1. 1)The organization’s profile—information that sets the overall context for understanding the organization’s performance,
including its strategy, profile, and governance;
2. 2)The organization’s management approach—information about the organization that provides the context for
understanding its performance;
3. 3)The performance indicators—which provide information on the economic, environmental, and social performance of the
organization.

12) What is the sustainability triple bottom line?

Some companies, which support sustainability, talk about their triple bottom line, striving for sound performance in three areas—
economic, social, and environmental. Social perspective on sustainability means social justice. this includes matters injustice,
inequality, poverty and exclusion. Environmental perspective on sustainability is that of effective management of physical
resources. Economic perspective on sustainability is that of growth in population, industrial activity, use of resources and generally
about economic performance.
13) what are Carroll 4 part model?
1. 1.Economic responsibilities companies have shareholders who demand a reasonable return on their investment, they have
employees who want good jobs and they have customers who want their products to satisfy their needs. So the first
responsibility of business is to be a well-functioning economic unit and to stay of business. According to Carroll the
satisfaction of economic responsibilities is thus required of all corporations.in the extreme, this leads to the idea that some
large banks are “too big to fail” because their basic economic functions are so vital to society that they should be “failed
out” by governments and taxpayers when in trouble.
2. 2.Legal responsibility the legal responsibility of corporations demands that businesses protect law and “play by the rules of
game”. As with economic responsibilities, Carrol suggest that the satisfaction of legal responsibilities is required of all
corporation seeking to be socially responsible.
3. 3.Ethical responsibilities these responsibilities oblige corporations to do with is right, just and fair even when they are not
compelled to do so by the legal framework. Carroll argues that ethical responsibilities, therefore, consist of what is
generally expected by society over and above economic and legal expectations.
 4. 4.Philanthropic responsibilities lastly at the tip of the pyramid, the fourth level of corporate social responsibility is the
philanthropic responsibilities which develop and improve the quality of life the employees, local communities and
ultimately society in general.

Chapter 10
The governance of listed company
1. Distinguish a holding company, a wholly owned, a partly owned subsidiary company, and an associated company?
A holding company is a company that holes all of the dominant shares of the voting rights in another company.
A subsidiary company is a company in which and other company (its holding company) holes all of its voting shares (a wholly owned
subsidiary) or a majority of its voting shares (partially owned subsidiary).
An associate company is a company over which another company exercises dominant power even though it does not hold a
majority of the voting rights in that company, for example where the other shareholders are widely spread.
2. Why might a company incorporate in an offshore jurisdiction?
The primary reason is, typical, low taxation with some businesses exempt from profit tax, and no capital gains or wealth taxes.
Additionally, an offshore jurisdiction might have good community relations, political and economic stability, no exchange controls,
and offer companies registered their flexibility, corporate privacy and confidentiality. A pool of professional service providers, sound
company draw, and regulation that is reasonably but not bureaucratic.
3. Can shareholders attend internal meetings of the company or access management accounts and other corporate information?
Shareholders do not have a right to attend internal meetings of the company, to access management accounts and other corporate
information, or to get involved in management.
4. Why do groups adopt a chain structure?
Principally to leveraged financial power gain from the gearing. By investing in a chain, the head of the chain is able to exercise more
influence over the companies in the chain then would be available by investing in individual companies in the chain.
5. What are dual – class shares?
Dual-listed corporate groups need to be distinguished from dual-class shares. The corporate constitution of some companies
provides for two or more classes of voting shares in which one class enjoys greater voting rights than the other class, or all of the
voting rights.
6. What is a nomad?
A nominated adviser authorized by the UK Alternative Investment market (AIM), which all Alternative Investment market (AIM)
companies are required to appoint. The nomads experience provides a quality control mechanism by checking the company’s plans
and certifying to the exchange that the company is suitable and ready for listing. The company’s broker, lawyers, auditors, and
financial institution also provide support services.
7.what is dual-listed company?
A dualistic company is a group structure in which to listed companies merge that both companies, but both continue to exist and
share the ownership of a single operational business. The group maintains its two separate stock exchange listings, with different
shareholders typically in different countries.
8. Why might companies consider entering into joint venture agreement?
Many companies use joint ventures with another company to enter markets, transfer technology, procure supplies, obtain finance,
share management skills, manufacturer products around the world, or share risk in on an international scale.
9. What activities might shareholder activism include?
Shareholder activism can take a number of forms. Shareholder activism can include communication and negotiation direct with
management, but also media campaigns or blogging to change corporate practices, proxy battles advancing shareholder resolutions
to force change, calling shareholder meetings, all litigation against companies or their directors. Some shareholder activists use their
shareholding to advance their own social, environmental, or other agenda, and influence corporate behavior.
10. Can companies hold shares in themselves? Give examples?
Only in some company law jurisdictions. In other jurisdictions, companies are prohibited from investing in themselves through group
networks
11. what is Insider trading?
Insider dealing (or insider trading) is the buying or selling of shares on the basis of information that is not yet available to the stock
market. It is now illegal in almost all jurisdictions, although some countries were slow to criminalize the activity.
12. what is the institutioanl investors and what can do?
Where institutional investors own a significant proportion of the voting shares in a company and could act together, they form a
block of shareholders. If they do act as a block, they may be able to influence corporate decisions, for example on corporate
strategy, including acquisition policy, on the appointment or dismissal of directors, and on financial strategy, including dividend
policy or capital restructuring.
13.what are benefit and disasvatage dual-list?
The benefits for dual-listing include:
1. 1)continuing existing successful businesses;
2. 2)protecting brand names;
3. 3)taxation benefits;
4. 4)sustaining national pride, avoiding claims that one country is losing ‘its’ company to another.

The disadvantages can be:

1. 1)conflict between the two managements, for example on resource allocation;
2. 2)disagreements between the boards, unless all directors are common to both;
3. 3)legal difficulties in applying the inter-company contracts;
4. 4)challenges from shareholders about unfair benefits to the other company;
5. 5)taxation difficulties, including transfer prices for inter-group trading;
6. 6)problems if the group wants to unravel the dual-listing agreement

Chapter 13
1. What is a remuneration committee
The remuneration committee is a subcommittee of the mainboard, consisting wholly or mainly of independent outside directors,
which is set up with responsibility for overseeing the remuneration packages of board members, particularly the executive directors
and possibly, members of senior management
3. Name some of the corporate values declared by Microsoft
Integrity and honesty, passion for customers, for our partners, and for technology, openness and respectfulness, taking on big
challenges and seemed them through, constructive selfcriticism, self-improvement, and personal excellence and accountability to
customers, shareholders, partners, and employees for commitments, results, and quality.
Desirable attributes in a director
6. Integrity -

Distinguish right from wrong and judge corporate behaviour accordingly

Recognize and declare a conflict of interest

Act in the company interest, not self-interest or personal gain

acting honestly, trusted

7. Independence –

For Independent Non-executive Directors (INEDs)

- having no interest in the company that can affect or be seen to affect the exercise of independent, objective judgement
For Connected Non-executive Directors (CNEDs) and Executive Directors (EDs)
being able to recognize the nature and extent of interests in the company
being able to exercise independent judgement, doing what is right for the company despite personal or other interests.

8. Intellect - they call having ‘a good mind’. It combines an appropriate level of intelligence, the ability to think at different levels
of abstraction, and the imagination to see situations from different perspectives, rather than always seeing things from a fixed
viewpoint. A sound intellect is able to exercise independent judgement, to think originally, and to act creatively.

9. Character - Character traits, what some call ‘strength of character’, include being independently minded, objective, and
impartial. A director needs to be capable of moving towards consensus. a director needs to be tough-minded and resilient, with
the courage to make a stand. Further, a director needs to be results-orientated, with a balanced approach to risk— neither risk-
averse nor rash.

10. Personality - Desirable personality traits in a director include the ability to interact positively with others, which from time to
time may call for openness, flexibility, sensitivity, diplomacy, persuasiveness, the ability to motivate, and a sense of humour.
Such interpersonal abilities are particularly important in interactions with the chair and boardroom peers. Other desirable
personality traits include being a sound listener and a good communicator.

4. In addition to integrity, what other personal qualities are found in high-calibre directors
They can be summarised as intellect, character, and personality.
Lord Nolan’s seven principles of public life
1. selflessness
2. integrity
3. objectivity
4. accountability
5. openness
6. honesty
7. leadership

5. Name some essential Director level skills

The essential director-level skills include:
strategic reasoning, perception, and vision;
a critical faculty capable of quantitative and quality of analysis and financial interpretation;
planning and decision-making capabilities;
communication and interpersonal skills;
networking and political abilities.

Essential director-level experience supplements the knowledge available to the board

for example, additional experience about financial reporting standards, corporate governance, board procedures,
strategy formulation, and policy-making
or experience of overseas markets, frontier technologies, international finance.

Knowledge
Directors need appropriate knowledge of the enterprise, its business and board-level activities, as well as relevant
information about the company’s political, economic, social, and technological context

Knowledge of the company involves a clear understanding of:

(who are shareholders, where does power lie to appoint directors)

The governance rules and regulations

The board structure, membership, and personalities

The board processes, such as the use of board committees and the basis of board information
 An awareness of the history.

Knowledge of the business involves an understanding of:

The basic business activities and processes
Its purpose and aims
Its strengths and weaknesses
How it measures success
including markets and competitors)
The structure of the organization, its culture, management, and people,
Management control and risk management systems.

Knowledge of the financials involves an understanding of:

How the company is financed
The essence of its annual accounts and directors’ reports
key financial ratios
Criteria used in investment appraisals
Calibre of financial controls
Who the auditors are

Roles directors play:

1. Performance-related roles

• Bringing wider business and board experience to the identification, discussion, and decision of board-level issues

• Identifying issues that the board, not management, should be handling

• Adding specialist knowledge, skills, and know-how to board deliberations

• Being the source of external information for board discussions - a window on the world for other directors

• Being a figurehead or an ambassador for the company, being able to represent the company in the outside world

• Connecting the board to networks of useful people

• Providing status to the board and the company.

2. Conformance-related roles

• Providing independent and objective judgement

• Providing a catalyst for change, questioning existing assumptions, introducing new ideas

• Being a monitor of executive activities, offering objective criticism and comment on management performance

• Being a sounding board for the chairman, the chief executive, or other directors

• Acting as a safety valve, able to act in a crisis.

7. What are the essential legal duties of a director

1. A duty of trust-to exercise a fiduciary responsibility to the shareholders

a. Act honestly - for the benefit of members

b. Show independence of judgement

c. Avoid conflict of interest

d. Act fairly

2. a duty of care-to exercise reasonable care, diligence and skill

8. How does a related-party transaction affected director
Related-party transactions provide a good example of the requirement to disclose personal interest. The listing rules of most dock
exchanges and security regulators require relatedparty transactions to be disclosed and, often, approved by other shareholders.
A related-party transaction is one between a company and another person or company closely related to it, such as a director or a
major shareholder. For example, the purchase by a company of a property from one of its directors would be a related-party
transaction and would need to be disclosed by that director to the board.
The listing rules of most stock exchanges and the rules of securities regulators require related-party transactions to be disclosed and,
in some cases, to be approved by the shareholders. Related-party transactions are frequently found in family firms

Chapter 15
What is a principal role of the remuneration committee of the board?
The remuneration committee is responsible for recommending to the board the remuneration packages of executive directors, and
sometimes other top management, including their salary, fees, pension arrangements, options to acquire shares in the company and
other benefits
2. What is the principal role of the nomination committee of the board
The role of the nomination committee is to suggest names for board membership, in an attempt to introduce different experience,
personalities, and diversity to the board, and to avoid domination of the nomination process by the Chairman, CEO, or any other
dominant directors.
3. What is the primary role of the audit committee
The primary role of the audit committee is to liaise between the board and the independent external auditors
4. What might that primary role include
Liaising between the board and the independent external auditors might include:
making recommendations to the board on their appointment, reappointment, or removal and replacement;
reviewing and approving their terms of engagement;
ensuring their objectivity and independence from the company, confirming that no conflicts of interest exists that could affect
the auditor’s ability to issue an unbiased opinion on the company’s financial statements;
developing and implementing a policy for their engagement on non-audit work;
working with them on audit procedures and plans, receiving the auditor’s report and management letter about issues that have
arisen during the audit, and reviewing and acting on these issues.
5. What other duties might a modern audit committee undertake
1. liaising between the board and the independent external auditors, including: Advising the board on the appointment. re-
appointment, resignation, or replacement of the external auditor
2. liaising between the external auditor, the internal auditor, and the board as a whole;
3. ensuring the independence of the external auditors, reviewing the extent of non-audit work undertaken by the external
auditors, and the fees involved
4. Reviewing the audit fees and advising the board accordingly
5. Considering the scope of and the plans for the audit by the external auditors.
6. Agreeing the scope of the work and plans of the internal audit
7. Ensure that the activities of the external and internal auditors are coordinated, avoiding both duplication or incomplete
coverage
8. Reviewing the appointment, performance, remuneration, and replacement or dismissal of the head of the internal audit
function, ensuring continuing independence of the internal audit function from undue managerial influence.
9. Reviewing with the external and internal auditors and advising the board on the adequacy of the company’s internal
control systems, security of physical assets, and protection of information
10. Reviewing with the external and internal auditors and advising the board on the company’s financial statements prior to
publication, the auditor’s report to the shareholders, any changes to accounting policies, material issues arising in or from
the financial statements; and compliance with accounting standards, company law reporting requirements and corporate
governance codes of good practice.
 11. Reviewing the exposure of the company to risk and any matters that might have a material affect the company’s financial
position, including any matters raised by company regulators or stock exchange listing committees. (Sometimes the
responsibility of a separate board strategic risk committee)
12. Reviewing annually the charter of the audit committee itself and advising the chairman of the board if changes are
necessary.

6. What might boards, and in particular their audit committees, look to the internal audit function to provide?
1. an ongoing analysis of business processes and associated controls
2. an evaluation of the extent and effectiveness of these control systems
3. regular reviews of operational and financial performance
4. assessments of the achievement corporate mission, policies, and objectives
5. identification of areas for more efficient use of resources
6. confirmation of the existence and value of the company’s assets
7. ad hoc inquiries into possible irregularities and frauds
8. reviews of the compliance framework
9. identification of compliance issues and confirmation of compliance
10. reviews of the organization’s values and code of conduct or ethics
7. Who is responsible for the financial accounts of a listed company – the auditors or the directors
The directors are responsible for the preparation of the financial statements, and for being satisfied that they give a true and fair
view. The auditors responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and
international auditing standards.
8. In the United States, what do the PCAOB standards require auditors to do?
PCAOB standards require auditors to:
obtain reasonable assurance that effective internal control over financial reporting has been maintained;
assess the risk that a material weakness exists, testing and evaluating the design, and operating effectiveness of internal control
based on the assessed risk;
perform such other procedures as are considered necessary in the circumstances.

9. In the United States, what is the company secretary typical known as, and who carries out that role?
In the United States, the company secretary is typically known as the corporate secretary, and the role is frequently carried out by
the corporate lawyer.
10. What might the duties of a company secretary typically include?
1. Advising the chairman on legal rules and regulations affecting the enterprise
2. Convening board, board committee, and company (shareholder) meetings
3. Advising on and guiding board and board committee procedures
4. Advising the chairman on agenda and writing the minutes for the chairman's approval
5. Maintaining the company’s statutory records such as the register of members (shareholders), register of directors and their
interests, directors’ service agreements,
6. Filing company law returns with the companies’ registrar or regulatory authority
7. Ensuring compliance with companies legislation, the corporate governance codes, and where appropriate the stock
exchange listing requirements
8. Ensuring compliance with other relevant regulations and laws
9. Administering changes to the company constitution (memorandum or articles of association).

Chapter 17
1. How does one go about assessing a director’s performance?
See text
2.How are many director appraisals are done at the moment?
In many cases at the moment, director appraisals are being conducted in an informal way, with the chairman personally assessing
the performance and commenting privately to the director involved.
3. Is the pressure on foot director appraisal to be more formalised?
What is needed to set up such a process? Yes, the pressure is on for director appraisals to be more formalised. To set up such a
process needs a board policy decision, with the full support of all the directors.
4. What is the usual output of an individual director performance assessment? How is it used?
Typically, the output of an individual director performance assessment will be a confidential report to the chairman and, possibly,
the chairman of the board’s nomination committee, if involved in the review process. Given the personal nature of the report, most
chairmen will not table it at a board meeting, but discuss the relevant portion with the director.
5. How is the performance of a chairman assessed?
The UK corporate governance code calls on the non-executive directors, led by the senior independent director, to be responsible
for performance evaluation of the chairman, taking into account the views of executive directors. But in most cases, the Chairman’s
performance is reflected in the performance of the company as a whole. Continued poor performance will bring calls for a change of
chairmen from major investors, the media, or occasionally from fellow directors who are dissatisfied.
6. Do many corporate governance codes and stock exchange listing rules now call for an annual assessment of the performance
of individual directors, and of the performance of the board and board committees?
Yes and yes
7. Who might be asked to undertake a board review?
The chairman often assumes the role of:
- an experienced INED, perhaps the senior INED;
- an Executive Director, such as the CEO or the CFO;
- the internal auditor; - the audit committee;
- a past chairman;
- a respected chairman or INED from the board of another company not in competition;
- an independent organisational firm of consultants
8. Describe the stages in a board review project
Refer to text
9. What are the principal elements in the Standard and Poor’s GAMMA corporate governance ratings?
- Ownership structure and external influence
- shareholder rights and relations
- transparency, disclosure, and audit
- board structure and effectiveness
10. Name some of the systems for evaluating corporate governance at the country level
- The World Bank and International monetary fund reports on the observation of standards and codes (ROSC) program
- the European bank for Reconstruction and development (2003) (EBRD) corporate assessment project
- the FTSE ISS CGI company ratings